A piggyback loan, also known as an 80-10-10 loan, allows a borrower to finance 90% of a home's purchase price using two mortgages and only 10% in down payment funds. The name comes from the secondary loan "piggybacks" on the primary. Some financial institutions use the term "combo loan," which is pronounced "eighty-ten ten," instead.

Although the term "piggyback loan" fell out of favor in the years following the housing meltdown, it has made a resurgence in more recent times. Most borrowers choose an 80-10-10 mortgage because they want to buy a new house before selling their present one, circumvent the tight lending requirements of jumbo loans, or minimize the out-of-pocket costs associated with private mortgage insurance. The phrases "80-10-10 piggyback mortgage loan" and "piggyback loan" are used synonymously throughout this piece.

What Does It Mean To Have An 80/10/10 Mortgage?

The 80-10-10 loan is two mortgages with a down payment of only 10% each. The first number always denotes the principal loan amount, the second the secondary loan amount, and the third the down payment.

The most typical ratio for a piggyback loan is 80-10-10. However, there are other conceivable combinations. Condominium buyers, for instance, can qualify for more affordable mortgage rates by borrowing no more than 75% of the property's value using a 75/15/10 loan.

What Is The Procedure For A Piggyback Loan?

The first mortgage accounts for eighty percent of the property's worth, while the second mortgage provides the remaining ten percent. Then, the borrower is expected to put down 10%. Greg McBride, CFA, chief financial analyst at Bankrate, argues that borrowers can reduce their down payment to 5% by opting for an 80/15/5 loan.

Common Piggyback Loan Structures

There are several varieties of piggyback loans.

Borrowing Money For A Second Home:

Typically, two mortgages will be in place when someone takes out a piggyback loan. That entails two separate closings, each with its fees and conditions. Two lenders may have to be used.

Credit Against The Value Of Your Home:

A home equity loan is a lump sum of money you can borrow against the value of your property if you're currently the owner and have paid off or reduced your mortgage to 80% or less.

HELLO:

A home equity line of credit (HELOC) is quite similar to a home equity loan, with the main differences being that the interest rate on a HELOC is variable, meaning that your monthly payments can fluctuate and that you will draw down funds rather than taking them all out at once.

Piggybacking: the benefits and drawbacks

Benefits

Monthly Payments On Mortgage Insurance Can Be Avoided.

The biggest benefit of getting a piggyback loan is not having to pay for private mortgage insurance. According to the Urban Institute, the average yearly PMI premium for a conventional loan borrower with a down payment of 3.5% varies from 0.58 percent to 1.86 percent of the loan amount, with the spread dependent on the borrower's credit score. A piggyback loan can provide a reprieve from your insurance premiums so that you can avoid downsizing your house.

In Other Words, You Won't Have To Worry About Getting A Too-Big Loan.

A higher credit score, larger down payment, and substantial savings are often required to qualify for a jumbo loan. Those rules will only apply if the piggyback arrangement helps the loan stay within conforming limitations.

Paying Less Of An Initial Sum Is An Option.

Most piggyback loans need a 10% down payment, but you could likely locate one with an 80/15/5 structure, in which case your down payment is 5% of the price.

Cons

Your Payments May Shift.

A piggyback loan comes with additional fees. According to McBride, the interest rate on a second loan is often higher and is variable, meaning that your payments will increase if the interest rate does.

There Are Still Two Sets Of Fees Associated With The Closing.

If you opt for a conventional second mortgage, two closing costs will be due. That reduces the money you would have saved by not getting PMI.

If You Need To Refinance, You May Run Into Some Problems.

One potential complication of having loans with two separate banks is trying to refinance later.

The Challenges Of Getting A Piggyback Loan And Why They Matter

The conditions for a jumbo loan can be difficult to meet but piggyback loans can help. There is still a requirement for a stellar credit score, and the requirement to borrow more money may raise questions among potential lenders. It is reasonable to assume that a thorough investigation into your ability to repay the two loans will be conducted. Debt-to-income (DTI) ratios will be scrutinized more closely; thus, paying down existing debts will help your application for a piggyback loan.