What Is A Piggyback Mortgage Loan And How Does It Work?

A young couple in front of their new home financed with a piggyback mortgage.

Key Takeaways

  • A piggyback loan is a second mortgage that homeowners use to help finance the down payment when purchasing a house.

  • The risks of a piggyback mortgage include greater interest payments and potential exposure in the event of unfavorable market conditions when selling the home.

  • A homeowner interested in accessing home equity to pay debts or make home improvements might prefer a home equity agreement to a second mortgage.

The greatest obstacle for many when it comes to buying a home is saving the capital necessary to cover the down payment. Other debts and living expenses can significantly delay a prospective home buyer who otherwise has the income to afford a monthly mortgage payment. In response, some lenders offer what is known as a piggyback mortgage to help buyers achieve their goal of owning a home.

This article explains the key details of piggyback mortgages and how they differ from conventional mortgages. Additionally, you’ll learn about the risks of piggyback mortgages.

What Is a Piggyback Mortgage?

A piggyback mortgage is a type of second mortgage that people use to finance the down payment on a home purchase. In a standard real estate transaction, a buyer will provide funds to use as a down payment, and then obtain a loan (mortgage) to finance the remainder of the home’s purchase price. The down payment is usually a percentage of the purchase price. Its purpose is to provide the homeowner with some equity in the real estate – for both buyer and seller security.

In a 2019 survey about Millennial homeownership, 61% of participants stated that the main financial obstacle to ownership was the down payment.

For young borrowers (or others without the cash for a full down payment), a piggyback mortgage is an alternative financing structure. Generally, a piggyback mortgage involves a borrower obtaining two separate loans. The first loan operates like a traditional mortgage that covers most of the purchase price. The borrower repays it over a fixed term. The second loan – the piggyback loan – will generally be for a shorter term and likely at a higher interest rate.

Is a Piggyback Mortgage the Same as an 80/10/10 Loan?

A piggyback mortgage is also known as an 80/10/10 loan. The latter’s name comes from the way the borrower and lender allocate the funds to purchase the home. Eighty percent comes from the first mortgage. Ten percent is the second mortgage used to fund part of the down payment. The remaining 10 percent comes from the borrower’s unfinanced funds and covers the remainder of the down payment.

How Does a Piggyback Mortgage Differ From Other Second Mortgages?

What makes a piggyback mortgage unique from other types of second mortgage is the timing. Traditional "second mortgages" (now generally referred to as home equity loans or home equity lines of credit) usually originate sometime after the initial purchase of the home, making them secondary to the primary mortgage. Additionally, borrowers use the proceeds from the second mortgage for reasons unrelated to buying the home that secures the loan.

In contrast, a piggyback originates at the same time as the primary mortgage (or shortly before it) because its purpose is to finance the purchase.

Benefits of Piggyback Loans

A piggyback loan can offer two distinct benefits:

Keeps the Down Payment Low

Piggyback loans can be helpful for young borrowers who haven’t had time to save for a down payment, or for people who want to prioritize other financial goals with their capital. For example, forgoing the traditional 20% down payment may help with maintaining an emergency fund, repaying other debts, or saving and investing for retirement.

No Need to Pay for Private Mortgage Insurance (PMI)

Lenders require borrowers who don’t place enough down payment on a house to maintain PMI. The purpose of PMI is to give a lender additional recourse in case the borrower defaults or the home’s market value sharply declines. Aside from not having to pay for PMI, piggyback mortgage holders may be able to deduct their interest on the loan from their income taxes.

How to Apply for Piggyback Loans

You apply for a piggyback mortgage as you would other loans. Depending on the institution, you may be able to obtain both your main mortgage loans and your piggyback loan through the same lender. If your lender doesn’t offer piggyback mortgages, they will likely have other lending institutions they work with to help you obtain one.

As part of the process, a lender will generally check your:

  • Credit score

  • Debt-to-income ratio

  • Source of your income

Lenders will likely want to see stronger credentials than would be necessary to qualify for a conventional 80/20 mortgage (i.e., higher credit score and income) because you’re applying for a larger total loan amount.

Risks to Using a Piggyback Mortgage

All financial transactions carry risks of varying levels. Identifying and understanding those risks will allow you to make the right choice for you.

Lack of Equity You Hold in the Home

Theoretically, having less equity in your home is not an issue if you can maintain the monthly mortgage, because you’ll gradually build equity over time, with each principal payment.

However, the lack of equity can become an issue if you encounter a situation where you’re unable to meet the loan obligations. To hedge against that risk, homeowners with a piggyback mortgage should prioritize building a good-sized emergency fund. They also can consider making additional principal payments, when possible, to increase equity in the house.

Sale During a Market Downturn

The other risk of having less equity in your home arises when you must sell the home for less than what you paid for it. Real estate, while generally stable, can experience periods of stagnation or drops in market pricing. These periods are often unpredictable and can stem from a variety of external factors.

  • Job loss

  • Work relocation

  • Family emergencies (e.g., medical issues, death, etc.)

  • Divorce

  • Marriage

When these unexpected selling scenarios occur in a down market, a homeowner with a piggyback mortgage risks not generating enough proceeds from the sale to repay the loan obligations. In other words, you may find yourself in a debt situation with no other assets to liquidate and repay the loans. The result may risk your financial security, and could even be a bankruptcy.

Higher Interest Payments

In the short term, a piggyback mortgage might seem like a great deal. You can purchase an important asset that allows you to build equity over time. Yet with lower equity, the home can easily become a liability on your balance sheet in the short term.

The table shows that even a slight increase in the interest rate of a mortgage can have a significant impact on the overall cost over a loan’s lifetime.

The additional downside is that you’ll likely pay more for the home in the long term because of the higher interest rate that comes with a second mortgage. That extra interest becomes another expense that you must pay every month – with income that you could use towards other financial goals.

Potential for Less Financial Flexibility

Having a piggyback mortgage extends your credit beyond the point of a conventional mortgage. This may affect your ability to make future financial commitments. As mentioned above, you may not be able to sell the home when you’d like because of market conditions. You might also have trouble obtaining additional credit – such as credit cards, auto loans or small-business loans – down the road.

What to Consider Before Getting a Piggyback Mortgage

A piggyback mortgage is a major financial undertaking that requires a strong understanding of your finance situation.

Your Financial Stability and Sources of Income

You may want to consider how well your career and current job align with the financial commitment of a second mortgage. It may reduce your mobility should things change in your work or family life.

For example, jobs that are prone to sudden and frequent relocation might not be the best situation for a second mortgage because of the increased risk of a below-market sale. Business owners, freelance workers, or those with seasonal jobs should also be careful when considering a second mortgage because their source of income might be more volatile than those earning a regular paycheck and receiving a W2.

Alternative Method

For someone who is already a homeowner and looking to buy a new home before theirs is sold, a piggyback loan may bridge the gap if they can’t cover a 20% down payment. In this case, a Home Equity Agreement (HEA) might be an alternative. Through a company like Unlock, you can sell a percentage of your current home’s future value. In exchange, you receive cash proceeds that you can use to cover the down payment.

An HEA can also be helpful when purchasing a vacation home or acquiring a rental property.

Some general eligibility requirements include:

  • Your property must be residential (non-commercial)

  • A minimum credit score in the 500s

  • Equity in your home of at least 25%

You can review Unlock’s FAQ page in addition to the sections below to learn more about the details of a HEA.

How Much Money Can I Receive Through a Home Equity Agreement?

The amount of cash you can receive under a Home Equity Agreement will vary depending on factors such as your home’s condition and its location. Generally, a homeowner may expect an amount equal to 10% of the home’s current value. The HEA provider then receives an equity interest in your home for a percentage slightly above the percentage of cash proceeds you receive. For example, 16% of equity interest in exchange for 10% of cash proceeds is not uncommon.

How Long Do I Have to Repay the Amount I Owe Under a Home Equity Agreement?

Standard Home Equity Agreements typically have 10-year terms. This provides homeowners with some flexibility for repaying the home equity provider within that period. One option is to sell the home within those 10 years and repay the owed percentage from the sale proceeds. You may also have the option to buy out the HEA provider’s equity interest in advance.

The process for buying out the interest generally requires an independent appraisal to evaluate the home’s fair market value.

What is the Advantage of an HEA Compared to a Piggyback Mortgage?

The benefit of using a Home Equity Agreement is that you won’t have a traditional monthly mortgage payment that accrues interest. This can greatly improve your cash flow, and adds flexibility for when and how you save to eventually repay the terms of the HEA. Homeowners must be mindful of their outstanding obligations under the agreement as they navigate other financial decisions during that 10-year window for repayment.

Consider a Home Equity Agreement With Unlock

Be sure to review your unique financial goals, risk tolerance and other circumstances when considering a home equity transaction. The team at Unlock is available to discuss the details of a home equity agreement so you can make an informed decision about your home financing options.

Contact Unlock today to see if a home equity agreement is an appropriate alternative to a piggyback mortgage.

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