How Piggyback PMI Insurance Works

If you're in the market for a mortgage loan, you may have heard of a "piggyback mortgage." But what exactly is a piggyback loan, and could it be suitable for your home purchase? This guide covers the basics of piggyback mortgages: how they work, their pros and cons, and whether they should be part of your home financing strategy.

Key Takeaways on Piggyback Mortgages

Piggyback loans combine a primary mortgage with a second mortgage, or HELOC, to cover the total home purchase price.
They can help buyers avoid PMI by keeping the primary loan under 80% of the value.
Potential benefits include lower down payment needs, better rates, and quicker equity building.
Drawbacks include higher monthly payments, more arduous approval, and refinancing challenges.
Solid credit scores are crucial to qualifying for a piggyback mortgage structure.
Piggybacks can help buyers afford a more expensive home within their budget.

What is a Piggyback Mortgage Loan?

A piggyback mortgage refers to getting two mortgage loans when purchasing a home: a primary mortgage for 80% of the home value and a second mortgage or home equity line of credit for the remaining 10–20% of the purchase price.

Instead of one primary mortgage, the loan is split into two parts with separate monthly payments. This structure allows buyers to avoid paying private mortgage insurance (PMI) while putting down less than 20% at closing.

How Does a Piggyback Home Loan Work?

With a piggyback mortgage, there are two loans:

The primary first mortgage, often for 80% of the home's value
The secondary piggyback mortgage, or HELOC, for 10–20%

Together, they cover 90–100% of the total purchase price, so the buyer doesn't need to come up with a complete 20% down payment. The loans may have different interest rates, terms, and lenders.

For example, if a home costs $300,000, the primary mortgage could be $240,000 (80% of the value). The piggyback second mortgage could be for $60,000 (20%).

What Are the Benefits of Piggyback Mortgages?

Some of the top advantages of piggyback home loans include:

Avoiding private mortgage insurance by not financing over 80% of the primary loan
Potentially qualifying for better rates by separating the loans
Lowering the down payment needed upfront to close on a home
Building home equity faster through two mortgage payments
Getting into a higher-priced home with a lower down payment

In the right situation, a piggyback loan can provide flexibility and savings. The second mortgage gives buyers alternative options for covering their down payment.

What Are the Downsides of Piggyback Mortgage Loans?

Some key drawbacks to watch out for with piggyback home loans are:

Higher monthly payments due to having two mortgages
Potentially higher interest rates, especially on the second loan
More complicated application, approval, and closing processes
Difficulty upgrading or refinancing down the road
Higher debt-to-income ratio, which could impact mortgage qualification

While they provide advantages, piggyback loans also come with increased costs and risks, which you should weigh against the benefits before moving forward.

What Credit Score is Needed for a Piggyback Mortgage?

To qualify for a piggyback mortgage, you will likely need a good credit score of at least 620, if not higher. Lenders consider the riskier nature of two combined loans, so solid credit is essential for approval.

The exact minimum score depends on the lenders. A higher credit score in the 700s may qualify you for better loan rates. A piggyback structure works best for buyers with solid credit who want flexibility.

How Do I Get a Piggyback Mortgage Loan?

Here are some tips for getting a piggyback home loan:

Talk to mortgage lenders about whether they offer piggyback products. Smaller lenders are more likely to provide them.
Ensure you understand both loans' rates, terms, fees, and closing costs.
Shop around and get quotes from multiple lenders to compare total costs.
Realize that the application and approval processes take longer with two loans. Start early so you don't miss closing deadlines.
Be prepared to provide extensive financial documentation to satisfy underwriting for two mortgages.

Can I Use a Piggyback for a Jumbo Mortgage?

Piggyback loans are commonly used to structure a jumbo mortgage that exceeds conforming loan limits.

For example, the primary mortgage could be for the maximum conforming amount. The piggyback second mortgage covers the remainder above the limit.

This allows buyers to purchase a higher-value home while benefiting from conforming loan rates on the first mortgage. The piggyback picks up the excess amount over the limit.

How Do I Pay Off a Piggyback Mortgage?

You make separate principal and interest payments on the first and second loans as required monthly. Extra costs can be applied strategically to pay down the higher-rate loan faster.

At some point, it may make sense to consolidate into one mortgage loan through refinancing. But extra fees may be required if you refinance too early. Be sure to compare overall costs before refinancing piggyback mortgages.

Frequently Asked Questions About Piggyback Mortgages

Q: What is a piggyback mortgage?

A piggyback mortgage, or a piggyback loan, combines two separate loans taken out simultaneously to buy a home. The first loan is typically for 80% of the home price, while the second loan covers the remaining 20%. The purpose of a piggyback mortgage is to avoid paying private mortgage insurance (PMI) and potentially obtain a lower interest rate.

Q: How does a piggyback mortgage work?

A piggyback mortgage works by splitting the home loan into two separate loans. The first loan is the primary mortgage, typically covering 80% of the home price, while the second loan is the secondary mortgage, covering the remaining 20%. The direct mortgage lender holds the first lien on the property, and the secondary lender has the second lien. These two loans are generally taken out concurrently to buy a home.

Q: What are the types of piggyback loans?

A: The most common types of piggyback loans are the 80-10-10 and 80-15-5 loans. The numbers in these loan types represent the loan structure. For example, in an 80-10-10 loan, the borrower contributes a 10% down payment, obtains an 80% first mortgage, and takes a secondary loan for the remaining 10%. In an 80-15-5 loan, the borrower contributes a 5% down payment, obtains an 80% first mortgage, and takes a secondary loan for 15% of the home price.

Q: Why would someone choose a piggyback mortgage instead of a traditional mortgage?

People choose piggyback mortgages to avoid paying PMI, which is required on conventional loans when the down payment is less than 20% of the home price. By getting a piggyback loan, borrowers can effectively make a larger down payment and avoid the additional cost of PMI. Piggyback loans may offer lower interest rates than jumbo or conventional loan options.

Q: How does a piggyback mortgage help to avoid paying PMI?

A piggyback mortgage helps to avoid paying PMI by splitting the home loan into two separate loans. The first loan, typically covering 80% of the home price, doesn't require PMI because the down payment is higher than 20%. The second loan, covering the remaining 20%, doesn't require PMI either because it functions as a second mortgage rather than a traditional mortgage loan.

Q: Can a piggyback mortgage be used to refinance an existing mortgage?

A: Yes, a piggyback mortgage can refinance an existing mortgage. If a homeowner wants to refinance their current mortgage but wishes to avoid paying PMI or obtain a lower interest rate, they may consider refinancing with a piggyback mortgage. However, it's essential to consider the costs and benefits of refinancing and consult with a mortgage professional.

Q: What are the benefits of a piggyback mortgage?

A: The benefits of a piggyback mortgage include avoiding the cost of PMI, potentially obtaining a lower interest rate compared to other loan options, and having more flexibility in structuring the loan amounts. It can allow borrowers to make a smaller down payment while still meeting the 20% requirement, and it may be advantageous for those who prefer to keep their first mortgage within certain loan limits set by Fannie Mae and Freddie Mac.

Q: What is the loan process for getting a piggyback mortgage?

A: The loan process for getting a piggyback mortgage is similar to a traditional mortgage. It involves applying for the loans, providing the necessary documentation to the lenders, going through the underwriting process, and closing the loans. Working with a mortgage professional who can guide you through the process and help you choose the best loan structure for your individual needs is crucial.

Q: Are there any drawbacks to getting a piggyback mortgage?

While piggyback mortgages can offer advantages, there are also potential drawbacks. One drawback is the complexity of managing two separate loans instead of one. Additionally, the second mortgage usually has a higher interest rate than the first mortgage, which may increase the monthly mortgage payment amount. It's important to carefully evaluate the costs and benefits of a piggyback mortgage before deciding.

Q: Can a piggyback mortgage be used for any home purchase?

A: Yes, a piggyback mortgage can be used to buy a home of any type, including primary residences, vacation homes, and investment properties. However, the eligibility criteria and loan options may vary depending on the location, type of property, borrower's creditworthiness, and loan term. Consult with a mortgage professional to determine the specific requirements and available options for your intended home purchase.

Conclusion

Piggyback loans aren't for everyone, but they provide unique options for financing a home purchase when used strategically. Understanding the pros, cons, and qualification criteria lets you determine if a piggyback mortgage aligns with your situation and financial goals.

SOURCE:
Termination of Conventional Mortgage Insurance
MGIC rate cards
Mortgage Insurance Coverage Requirements