One of the barriers between many Americans and homeownership is saving up enough money to make the required down payment, according to Fannie Mae research. In most cases, you must either make a 20% down payment or pay hundreds to thousands of dollars upfront or annually in mortgage insurance.
One solution you might be considering is called a piggyback mortgage. This involves using two mortgage loans to buy your home — a primary mortgage for the bulk of the cost and a smaller secondary mortgage to supplement your down payment.
While they make homebuying more accessible if you don’t have a large enough down payment and can’t afford (or want to avoid) mortgage insurance, they’re also far from foolproof. Piggybacks require you to manage two mortgage notes and, given potentially higher piggyback mortgage rates and possibly variable APRs, aren’t always the more cost-effective method.
Here’s a closer look at piggyback loans, how they work and whether borrowing one makes sense in your situation.
The basics of piggyback mortgages
A piggyback mortgage refers to buying a home with both a primary and a second mortgage. The second loan piggybacks on the first — hence the name — and helps to cover a portion of the down payment. This way, you can pay less out of pocket and possibly avoid private mortgage insurance (PMI) on a conventional loan.
Piggyback loans typically come in the form of home equity loans or home equity lines of credit (HELOCs) and hold a secondary lien position. In the event of a foreclosure, second lien holders are paid after the first lien holder. As a result, piggyback loans present more risk to the lender, which means you as the borrower face a more stringent underwriting process and higher interest rates.
While hard to find today, these loans were very popular in the early 2000s. By 2006, they had taken 40% market share from private mortgage insurers, according to the Federal Reserve Bank of St. Louis. Over half of buyers at the time were financing 90% to 100% of their homes. (Unfortunately, the heavier debt burden combined with various questionable lending practices at the time led to a flood of defaults and foreclosures that preceded the ensuing housing crisis.)
| 2006* | 2023** | |
|---|---|---|
Percent of buyers financing 100% of a home purchase | 29% | 14% |
Percent of buyers financing 90% or more | 52% | 42% |
Percent of buyers financing 80% or more | 71% | 64% |
*Source: National Association of Realtors (NAR)
**Source: NAR
While they’ve declined in popularity over the past 15 years, piggyback loans are still legal and available, though no less risky for borrowers and lenders alike. However, a range of low-down-payment mortgage programs have cropped up to serve borrowers who’d otherwise be attracted to piggybacks, like the Freddie Mac HomeOne and Fannie Mae HomeReady programs (more alternatives below).
How piggyback mortgages work
When you get a piggyback loan, both your primary and piggyback mortgages are finalized at closing. The proceeds of these loans, along with your down payment, are sent to the property seller. From there, you’ll have two monthly mortgage payments.
The most common piggyback loan structure is “80-10-10,” where 80% of a home’s purchase price is covered by the primary mortgage, 10% is covered by the piggyback loan and 10% is covered by the down payment.
Example: Under an 80-10-10 structure, if a home costs $400,000, the primary mortgage would cover $320,000, the piggyback loan would cover $40,000 and you’d have to pay $40,000 as a down payment. That said, the structure can vary by lender.
Here are a few other possible structures of piggybacks for a $400,000 home purchase:
| Structure | Primary mortgage | Piggyback loan | Down payment |
|---|---|---|---|
80-15-5 | 80% | 15% | 5% |
75-15-10 | 75% | 15% | 10% |
80-20-0 | 80% | 20% | 0% |
Why homebuyers might use a piggyback loan
Piggyback loans can come in handy if you’re approved for a mortgage but don’t have enough money to cover the required down payment. Perhaps you’re a first-time homebuyer with limited savings, or maybe you want to buy a new home before your current one has sold. In the latter case, a piggyback loan enables you to finance part of the down payment until your existing home sells.
Unlike some low-down-payment loan alternatives, this mortgage type can also help you avoid the cost of PMI (on a conventional loan) by enabling you to meet the minimum 20% down payment requirement. Further, if you’re looking to buy a home with a purchase price above the limits for a conforming loan (and you want to avoid non-conforming jumbo loans), a piggyback loan can help to cover some of the cost, bringing your primary mortgage loan amount below the conforming limit.
Types of piggyback mortgages
Piggyback mortgages typically come in the form of home equity loans (HELOAN) or HELOCs. Lenders may offer one or the other or both. Here’s a closer look at how each loan type works and when it can be best.
| What to know | Best for… | |
|---|---|---|
HELOAN | A lump-sum term loan secured by the equity in a home. It typically comes with a fixed repayment term, monthly payment amount and interest rate. | Homebuyers who want to pay off their balance over time and prefer predictable monthly dues. |
HELOC | A credit line secured by the equity in a home. It comes with a variable interest rate and a draw period. During the draw period, reduced or interest-only payments may be due. The full amount is often repaid through a balloon payment or new term loan when the draw period ends. | Homebuyers who plan to pay off the piggyback loan within a shorter period, perhaps before interest rates increase. |
Piggyback mortgage rates
Like the rate for a primary mortgage, awarded APRs on so-called second mortgages vary widely, depending on factors such as your credit history, loan amount and loan-to-value ratio. For a baseline, here are current HELOC rates:
Pros and cons of piggyback loans
| Pros | Cons |
|---|---|
|
|
Piggyback loans can help you afford a home you otherwise wouldn’t be able to buy and eliminate the need for PMI. In some cases, the piggyback and primary mortgage combination might be cheaper than the primary mortgage with PMI. Additionally, this loan type can help you keep your primary mortgage under the conforming loan limits and secure a lower mortgage rate.
On the downside, piggyback loans are often more difficult to get. You’ll be applying for two loans at once, and the second one presents a heightened risk to the lender. As a result, you’ll need higher credit scores and a lower debt-to-income ratio. Further, the interest rates are often variable (particularly with a HELOC), which results in higher monthly payments if market rates increase. And if you can’t afford the payments, your home can go into foreclosure.
“Adding more debt to your budget is always a risky proposition,” said Riley Adams, a San Francisco-based Certified Public Accountant. “There’s a reason lenders require you to carry PMI or MIP in the case of FHA loans. If you can't make the full 20% down payment at mortgage origination, they want to reduce risk.”
How to determine if a piggyback mortgage is right for you
If you need help with your down payment, a piggyback loan might seem like a no-brainer. However, it’s important to weigh the costs of repayment.
For an objective comparison, ask mortgage lenders for quotes that show the costs of a primary mortgage with PMI — and separately, the cost of the primary loan and piggyback loan without PMI. You can use a piggyback loan calculator (such as Good Calculators’) or a chart similar to the one below to compare the costs.
| Mortgage with PMI | Piggyback: Mortgage | Piggyback: HELOAN | |
|---|---|---|---|
Loan amount | $360,000 | $320,000 | $40,000 |
Loan term (years) | 30 | 30 | 30 |
Interest rate | 8% | 8% | 10% |
Monthly PMI | $300 | $0 | n/a |
Monthly payment (principal and interest) | $2,642 | $2,348 | $351 |
| Mortgage with PMI | Piggyback loan (combined) | |
|---|---|---|
Monthly payment (principal, interest, PMI) | $2,942 | $2,699 |
In this example, the piggyback loan saves the borrower $243 per month — but it assumes a fixed home equity loan rate. You might also make this comparison with variable HELOC rates. Along with the cost, weigh factors like the additional risk of a second loan.
Alternatives to piggyback mortgages
If you’re not sold on a piggyback mortgage but want to put down less than 20% on a home purchase, here are a few alternatives to consider.
| Down payment requirement | Basics | Best for | |
|---|---|---|---|
FHA loan | 3.5% |
| Borrowers with lower credit scores who can put 3.5% down |
VA loan | 0% |
| Eligible service members, veterans and their families |
USDA loans | 0% |
| Low-to-moderate-income families who want to buy in a rural area |
Fannie Mae’s Conventional 97, Freddie Mac’s HomeOne | 3% |
| First-time homebuyers in any income bracket |
Tip: If you qualify as a first-time homebuyer — you might, if you haven’t owned a home in the past three years — investigate homebuyer grant programs that offer down payment and closing cost assistance, among other forms of relief. You might combine such aid with one of the loan options listed above.
How to qualify for a piggyback mortgage
Lenders see piggyback loans as riskier to lend, so they naturally tighten their eligibility criteria. Here are the common requirements to expect:
- Good credit scores: Often at least 680 to 700.
- Not too much debt: A debt-to-income ratio of 36% to 43% or less, including the costs of both loans.
- Solid credit history: Missed payments, a limited history, high credit utilization or other delinquent marks will harm your credit reports and weaken your chances of getting approved.
Before applying for a piggyback mortgage — or loan of any kind — ensure your credit is in the best shape possible. You can get free weekly copies from AnnualCreditReport.com. If you find any mistakes, file disputes to get them fixed. You’ll also want to avoid requesting any other forms of credit while getting a mortgage.
Examples of piggyback mortgage lenders
If you’ve weighed the costs and risks of piggybacking — and considered the alternatives — shop around. Remember that piggyback loans are far harder to find than conforming mortgages, but you’ll likely have the best luck with local and regional lenders, such as:
- Blue Water Mortgage
- Chevron Federal Credit Union
- Citywide Home Loans
- LBC Mortgage
- Marimark Mortgage
Once you’ve found a few lenders, it would be wise to:
- Prioritize reputable lenders that offer pre-qualification so you can check your eligibility without a hard credit pull.
- Request multiple quotes from each lender — one for a home loan with mortgage insurance, another for a piggyback arrangement.
- Compare these quotes across multiple lenders to confirm that a piggyback loan is best for your situation and find the best mortgage lender.
Frequently asked questions (FAQs)
It can be challenging to find a mortgage lender that offers piggyback loans, as many national lenders no longer do. You might contact local lenders and search online. If you’re interested in a particular lender, call its customer service line and ask about its down payment assistance programs.
You should use a piggyback mortgage calculator after you’ve collected quotes from lenders. It can help you determine whether a primary mortgage with PMI or a primary mortgage and piggyback loan without PMI is cheaper.
Piggyback mortgages tend to have higher interest rates than primary mortgages because they’re riskier for lenders.
Yes, it’s possible to refinance a piggyback mortgage. If you have enough equity, you can refinance your first and second mortgage into a single new loan (ideally using one of the best mortgage refinancing lenders). You may also be able to get a new HELOC or home equity loan to replace the second-lien debt.
