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Piggyback Mortgages: Pros, Cons, and Considerations for Homebuyers

Last updated 04/08/2024 by

Rasana Panibe

Edited by

Fact checked by

A piggyback mortgage involves additional debt secured with the same collateral as the first mortgage. It encompasses various types, including second mortgages, home equity loans, and HELOCs. Typically used to cover down payments or avoid PMI, these mortgages affect the loan-to-value ratio and offer diverse financial options.

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What is piggyback mortgages

A piggyback mortgage encompasses supplementary loans secured by the same collateral as the primary mortgage. These mortgages serve multifaceted purposes, aiding borrowers with down payments or avoiding private mortgage insurance (PMI).

Purpose of piggyback mortgages

Primarily, piggyback mortgages help borrowers in multiple ways. Some facilitate down payments, enabling access to funds that contribute to the initial property purchase. Notably, borrowers generally possess the capacity for a limited number of piggyback mortgages due to their tie to the same collateral.
Moreover, piggyback mortgages are employed to circumvent PMI obligations. By obtaining a second mortgage or home equity loan simultaneously with the primary mortgage, borrowers can restructure their loan-to-value ratio. For instance, an “80-10-10” piggyback mortgage covers 80% with the first mortgage, 10% with a second loan, and the remaining 10% through the down payment. This adjustment minimizes the first mortgage’s LTV, eliminating the need for PMI.

Types of piggyback mortgages

1. Down payment mortgages: These provide funds for down payments, often sourced from down payment assistance programs. Proper disclosure of all down payment sources is mandatory for the primary mortgage lender.
2. Second mortgages: Borrowers usually secure a second mortgage with home equity as collateral. Home equity is the property’s appraised value minus the outstanding loan balance. Second mortgage options include standard home equity loans or home equity lines of credit (HELOCs).

Home equity loans and HELOCs

Home equity loans: These loans offer a lump-sum payment based on the borrower’s available equity. Borrowers use this for various purposes, such as home improvements, debt consolidation, emergencies, and repaying in monthly installments.
HELOCs: A revolving credit account using home equity as a credit limit. Borrowers have spending flexibility and can control outstanding balances based on transactions. Monthly interest accrues on revolving balances, with borrowers receiving statements for transaction details and required payments.
Weigh the Risks and Benefits
Here is a list of the benefits and drawbacks to consider.
  • Pay back less than what you owe.
  • Become debt-free in less time.
  • Avoid bankruptcy
  • Negative impact on credit score
  • Additional fee accrual
  • Remains on your credit history for 7 years.

Utilizing piggyback mortgages to eliminate PMI

Piggyback mortgages offer an avenue to eliminate PMI requirements by assisting in securing the necessary down payment to achieve an LTV ratio of under 80%. However, specific terms or constraints within the loans may limit this option.

The bottom line

A “piggyback” mortgage represents additional debt beyond the primary mortgage, encompassing various types catering to different financial needs. These mortgages serve as strategic tools for managing down payments and avoiding PMI obligations.

Frequently asked questions

Is a piggyback mortgage a junior or senior loan?

A piggyback mortgage is categorized as a junior loan, subordinate to the primary mortgage, which holds the status of a senior loan. Junior mortgages often carry higher interest rates, limited loan amounts, and additional restrictions.

Is a piggyback mortgage a combination loan?

If a single lender issues both the primary mortgage and a HELOC as a piggyback mortgage, it constitutes a combination loan. However, if the HELOC comes from a different lender, it does not qualify as a combination loan.

Key takeaways

  • A piggyback mortgage involves additional loans secured with the same collateral as the primary mortgage.
  • Types include second mortgages, home equity loans, and HELOCs, aiding in down payments or PMI avoidance.
  • Understanding the loan-to-value ratio adjustment is crucial for eliminating PMI through piggyback mortgages.
  • In addition to the primary mortgage, piggyback loans offer various financial options with distinctive limitations.

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