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Reasons to use a “piggyback loan” (80/10/10 loan)

Dan Green
The Mortgage Reports contributor

What is a piggyback loan? 

A “piggyback loan” — also known as an 80/10/10 loan —  lets you buy a house using two mortgages at the same time. 

The first mortgage typically covers 80% of the home price, and the second mortgage covers 10%. The remaining 10% is covered by your down payment. 

Why use an 80/10/10 loan? Because it can help you avoid private mortgage insurance (PMI), pay lower rates, or avoid getting a jumbo loan. 

In short, a piggyback mortgage gives you the benefits of a big down payment without having to save for one.  

Verify your piggyback loan eligibility (Aug 14th, 2020)

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How a piggyback loan works

A piggyback loan is actually two mortgage loans. The first loan is a mortgage for the majority of your borrowed amount, and the second loan is a mortgage for what remains.

The loan is known as a piggyback mortgage because the second mortgage is metaphorically “piggybacking” on the first, combining to make a loan size for the total amount you wish to borrow.

Piggyback loans are generally available up to 90% loan-to-value (LTV) on the purchase price. They usually include three separate parts: 

  • A first mortgage comprising 80% of the price
  • A second, “piggyback” mortgage comprising 10% of the price 
  • The remaining 10% of the home price covered by your down payment

This particular structure is known as an 80/10/10.

With piggyback loans, the 80% portion is typically a 30-year fixed rate mortgage, and the 10% portion is a home equity line of credit (HELOC).

Types of piggyback loans

There are two ways a piggyback loan can typically be structured. The first — an 80/10/10 loan — is the most popular. But a 75/15/10 loan is also an option. 

The 80/10/10 loan structure

The 80/10/10 is another common reference to piggybacks and, today, their availability is returning.

With home values up, banks are re-opening access to 80/10/10s. This is helping to promote homeownership nationwide — especially among homebuyers who have to buy a home before their current one is sold.

Piggyback mortgages make loans available with just a 10% down payment; while helping buyers to avoid the mortgage insurance payments typically associated with low-downpayment loans.

80/10/10 piggyback loans are commonly used to avoid PMI mortgage insurance or stay under the jumbo loan limit.

Other buyers will use piggyback loans because they’re buying a home that exceeds their local mortgage loan limits.

Via the piggyback loan, they can borrow up to $510,400 with their first lien, and then borrow the additional amount required via a second loan.

As an illustration, a buyer plans to make a 10% down payment on a $700,000 home where the local loan limit is $560,000. He or she may opt for a first mortgage of $560,000, a second piggyback mortgage of $70,000, then put $70,000 down.

Want to buy a home but don’t have 20 percent to put down? The piggyback loan may be a good fit.

Verify your piggyback mortgage eligibility (Aug 14th, 2020)

The 75/15/10 loan structure

Another typical piggyback loan structure is the 75/15/10.

With a 75/15/10, the first mortgage is for 75% of the purchase price, the second mortgage is for 15% of the purchase price, and the remaining 10% is the borrower’s down payment on the home.

It’s common to use a 75/15/10 loan when buying a condo to avoid higher mortgage rates.

It’s common to see the 75/15/10 used in conjunction with the purchase of a condominium. This is because mortgage rates for condos are higher when the LTV of the first mortgage exceeds 75%.

To avoid paying higher rates, then, condo buyers will limit their first lien size to seventy-five percent. The remaining fifteen percent is handled by the HELOC.

How to get an 80/10/10 loan

When you get an 80/10/10 piggyback loan, you’re applying for two separate mortgages at once: the “first lien” mortgage, usually worth 80% of the home value, and the “second lien” mortgage, usually worth 10%. 

Some lenders explicitly offer piggyback loans, letting you get both mortgages in the same place. 

But more often, borrowers end up getting their first mortgage from one lender, and their second mortgage — usually a home equity line of credit — from another. 

Luckily, you don’t have to go out and find that second mortgage on your own. 

Most borrowers looking for an 80/10/10 loan simply tell their preferred lender that’s what they want. That lender can then recommend a company to use for the second mortgage, which they will have worked with in the past. 

In this way, your “first mortgage” lender can help shepherd both applications through at once, making the process a lot more streamlined. 

Find a lender today (Aug 14th, 2020)

Qualifying for a piggyback mortgage

Remember that when you apply for an 80/10/10 mortgage, you’re actually applying for two loans at once. 

You have to qualify first for a mortgage, and second for a home equity line of credit (HELOC). 

That makes qualifying for a piggyback loan a little tougher than qualifying for a single mortgage. 

For example, you might be able to get a conventional loan for 80% of the home’s value with a credit score of just 620. But to qualify for a HELOC as well, you’ll likely need a credit score of 680 or higher. 

You’ll also need a debt-to-income ratio no higher than 43% when both loans are factored in. 

And, HELOCs have higher interest rates than 30-year mortgages. So a strong application is important to get you the lowest rate possible on both loans, and keep your borrowing costs down. 

Piggyback loan pros and cons

Pros & Cons of Piggyback 80/10/10 Loans

Piggyback loans avoid PMI

Mortgage insurance is usually required when the homebuyer puts less than 20% down. In other words: when the “loan-to-value ratio” (LTV) is 80% or higher. 

Because piggyback loans limit your first mortgage to 80 percent LTV, they can be an effective way to make a low down payment on a home while avoiding monthly private mortgage insurance (PMI) costs.

For some buyers, this is enough of a reason to use a piggyback loan. Some buyers will do whatever possible to avoid paying PMI, as it can easily cost $100-$300 per month on top of your mortgage payment. 

Real-life 80/10/10 loan example

As a real-life example of how a piggyback loan works, let’s consider a home buyer in Denver, Colorado. They have good credit, are purchasing a home for $400,000, and wish to make a maximum downpayment of $40,000, or 10 percent.

Assuming that this is not a military borrower who could use the VA Loan program, there are several mortgage options available to the buyer:

  1. The Conventional 97 program, which allows for three percent down
  2. The FHA mortgage loan, which allows for 3.5% down
  3. The HomeReady or Home Possible loans, which allow for 3% down
  4. A conventional loan at 90% loan-to-value
  5. An 80/10/10 piggyback mortgage

For this particular buyer, the Conventional 97 will not be the best fit. That’s because mortgage rates and PMI costs for a borrower making a 3% downpayment are slightly higher than for a borrower making a 10% downpayment.

An FHA loan may not be the best fit, either, because, with ten percent down, it’s often cheaper to use conventional financing at ninety percent LTV.

That leaves the 90% conventional loan, the HomeReady and Home Possible loans, and the piggyback as the three remaining choices.

With one loan at 90% LTV, the buyer will pay PMI charges monthly and will also pay higher rates and fees for the right to make a downpayment of just ten percent.

Although the PMI is just temporary, the higher rate is permanent, which adds to long-term costs.

And, to qualify for the HomeReady or Home Possible home loan, in many cases, your home must be located within certain census tracts; or, your annual household income must be within certain limits.

For most people, then, the piggyback loan emerges as the winner.

The buyer should get a first mortgage for $320,000 and an additional mortgage for $40,000, totaling $360,000.

Verify your piggyback mortgage eligibility (Aug 14th, 2020)
 
 
 
 

Piggybacks loans for financial planning

Piggyback loans offer another distinct advantage over “one-loan” programs, too — they can be excellent tools for financial safety and planning.

This is because of how the piggyback loan is structured.

Recall that the first lien in a piggyback loan is often a fixed-rate mortgage, for up to 80% of the home’s purchase price; and, that the second lien is often a home equity line of credit (HELOC).

HELOCs are extremely flexible in that they function similar to a credit card, except that the balance of a HELOC begins as “maxed out” whereas, on a credit card, the balance starts at zero.

This means that you can pay down your HELOC at any time, giving yourself the capacity to borrow should you ever need it.

For example, if you pay $10,000 to reduce your HELOC balance at any time during its existence, at a later date, you can write yourself a $10,000 check against the HELOC to use for any purpose necessary. It’s your money, after all.

You can even pay your HELOC in full then leave it “open” for future use.

Home buyers who have to buy a new home before selling their old one will use this trick. They will buy the new home with an 80/10/10 and then, after their trailing home sells, they’ll use the proceeds to pay the HELOC down in full.

This ten percent “cushion” can then be used in case of emergency; or, for home improvements; or, for any other purpose.

Like the credit card, there’s no interest accrued when no money is borrowed, which renders the still-open HELOC an effective tool for planning.

Refinancing a piggyback mortgage 

You might wonder: If I get a piggyback loan, will I ever be able to refinance? 

The answer is yes — but refinancing with a second mortgage is a little more complicated. 

You might be able to pay off the second mortgage when you refinance. In this way, you could combine two mortgage loans into one, effectively cutting down on your interest rate and overall interest paid. 

As long as you can prove that you used the full second mortgage to purchase your home, this will not count as a cash-out refinance. That means you can enjoy lower rates. 

However, you’ll need to be sure you have enough equity in your home to pay off any outstanding balance on the second mortgage when you refinance. 

You can refinance your piggyback mortgage to roll both loans into one, or refinance only the first mortgage land leave the second lien alone.

Your second option is to refinance only the primary mortgage, leaving the second lien (the “piggyback loan”) untouched. 

To do this, you’ll need to work with the lender that owns your second mortgage. It must agree to take second position behind your new, refinanced mortgage. This is called a “subordination agreement.” 

Overall, you shouldn’t be blocked from refinancing your piggyback loan into a lower rate at some point in the future. But be aware that there will be extra hoops to jump through. 

Piggyback loan FAQ

Can you still get an 80/10/10 mortgage?

Yes, you can still get an 80/10/10 mortgage. In fact, 80/10/10 “piggyback loans” have become more available in the years since the housing crisis. However, they’re still not as common as other mortgage types. You’ll have to do extra research to find a lender that offers both the primary and secondary mortgages. Or, talk with your preferred lender and see if they’ll work with you to find and apply for the second mortgage.

How do you qualify for an 80/10/10 loan?

To qualify for an 80/10/10 loan, you’ll need a 10% down payment; stable income and employment with tax records to prove it; and debt-to-income ratio no higher than 43%. You’ll likely also need a credit score of at least 680 to qualify for an 80/10/10 piggyback loan. 

Your first mortgage (the 80% conventional loan) might only require a 620 credit score. But your second mortgage (the 10%) will likely be a home equity line of credit or home equity loan that requires a score of 660-680 or higher.

Are piggyback loans a good idea?

For the right home buyer, a piggyback loan can be a great idea. To give a few examples, you might like a piggyback loan if you want to avoid private mortgage insurance; if you’re buying a new home before selling your old one; if you don’t want a jumbo loan; or if you’re buying a condo. (You can see details on these scenarios above.) 

However, there are drawbacks to a piggyback loan, too. For instance, it might not make sense to make a 10% down payment if that would drain your bank account. And the second loan — usually a home equity line of credit — will usually come with higher interest rates than the first mortgage. 

If a piggyback loan doesn’t sound right for you, there are other low-down-payment loans to consider.

How do I get a piggyback loan?

Most borrowers who use a piggyback loan start by applying with the lender they’ll use for their first lien (the mortgage covering 80% of the home price). That lender might underwrite your second mortgage itself. But more likely, it will recommend another lender for your piggyback loan and help you apply with that company.

Is it better to pay PMI or a second mortgage?

A second mortgage can help supplement your down payment to reach the 20% mark and avoid private mortgage insurance. But in some cases, it makes sense to pay for PMI instead of getting a second mortgage. 

If you don’t have the cash for a 10% down payment, it might be better to opt for a low-down-payment mortgage like the FHA loan or Conventional 97 that includes PMI. This lets you buy a house and start building equity sooner. Then, you can refinance into a no-PMI loan at a later date.

Can you refinance a piggyback loan?

There are two ways to refinance a piggyback loan. If you have enough equity, you may be able to pay off your second lien at the time you refinance — letting you essentially roll both loans into one. Or, you can refinance your first mortgage and leave your second mortgage (the smaller “piggyback loan”) untouched. This will require the approval of your second mortgage lender.

Do you have to pay PMI if you don’t put 20% down?

You generally have to pay PMI if you don’t put 20% down. But not always. The 80/10/10 “piggyback mortgage” is one way to avoid PMI. It lets you use a second mortgage, along with your down payment, to reach 20 percent and avoid mortgage insurance.

You can also look for special loan programs — usually run by big banks — that let you put less than 20% down without PMI. But these often have higher interest rates, so weigh the cost vs. benefit.  

What are today’s mortgage rates?

Today’s mortgage rates are low and home prices are on the rise. It’s an excellent time to buy a home. And for buyers who want to put less than 20% down, the piggyback loan is another tool to help make that happen.

Verify your new rate (Aug 14th, 2020)

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