The 80/10/10 piggyback mortgage is often cheapest
In this article:
- A piggyback loan is a type of mortgage structure in which a first and second mortgage are opened at the same time
- This structure can help a buyer avoid PMI, pay lower rates, avoid jumbo financing, or accomplish other goals
- More and more lenders are offering this program as its popularity rises
Piggyback mortgages & the 80/10/10
As the economy improves, U.S. lenders have made an additional low-downpayment mortgage options available to today’s home buyers — the “piggyback mortgage.”
The “80/10/10” (pronounced: “Eighty-Ten-Ten”) 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 home buyers 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.
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 (May 20th, 2019)
What is a piggyback loan?
A piggyback loan is two mortgage loans, actually. 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, with the first lien typically comprising 80% of the price, and the second “piggyback” mortgage comprising 10% of it.
This particular structure is known as an 80/10/10.
When you read “80/10/10”, the “80” represents the LTV of the first mortgage; the “10” represents the LTV of the second mortgage; and, the last “10” represents the downpayment which the borrower makes on its own.
With piggyback loans, most often, the 80% portion is a 30-year fixed rate mortgage and the 10% portion is a home equity line of credit (HELOC).
Another typical piggyback structure is the 75/15/10.
With a 75/15/10, the first lien is for 75% of the purchase price, the second lien is for 15% of the purchase price, and the remaining 10% is the borrower’s down payment on the home.
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.
Other buyers will use piggyback loans because they’re buying a home which exceeds their local mortgage loan limits.
Via the piggyback loan, they can borrow up to $484,350 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.
There are many reasons to consider piggyback loans.
Piggyback loans avoid PMI
Because piggyback loans limit your first lien 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 their reason for using piggyback loans at all. Some buyers will do whatever possible to avoid paying PMI.
Editor’s Note: PMI is neither good nor bad.
As a real-life example of how a piggyback loan works, let’s consider a home buyer in Denver, Colorado with good credit who is purchasing a home for $400,000 and wishes 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 Guaranty program, there are several mortgage options available to the buyer:
- The Conventional 97 program, which allows for three percent down
- The FHA mortgage loan, which allows for 3.5% down
- The HomeReady™ loan, which allows for 3% down
- A conventional loan at 90% loan-to-value
- An 80/10/10 piggyback mortgage
For this particular buyer, the Conventional 97 will not be the best fit because private mortgage insurance rates and mortgage rates for a borrower making a 3% downpayment are slightly higher than for a borrower making a 10% downpayment.
A 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.
So, that leaves the 90% conventional loan, the HomeReady™ loan, 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™ 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 (May 20th, 2019)
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.
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, now, for buyers who want to put less than 20% down, the piggyback loan becomes another tool to help make that happen.
Take a look at today’s real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.Verify your piggyback mortgage eligibility (May 20th, 2019)