If you’re in the market to buy a home, you may have heard of a “piggyback mortgage.” But what is it exactly, and how does it work? In this blog, we’ll explore the benefits and risks of piggyback mortgages and help you determine if it’s the right choice for you.
What is a Piggyback Mortgage?
A piggyback mortgage, also known as an 80/10/10 or 80/15/5 mortgage, is a type of mortgage that allows you to borrow money for a home purchase in two separate loans. The first loan is a traditional mortgage for 80% of the home’s purchase price. The second loan is a smaller loan, typically for 10% or 15% of the home’s purchase price, and is used to cover the down payment. This second loan is usually a home equity loan or line of credit, hence the name “piggyback.”
Benefits of Piggyback Mortgages
The main benefit of a piggyback mortgage is that it allows you to avoid paying private mortgage insurance (PMI). PMI is typically required when you put down less than 20% on a home purchase. With a piggyback mortgage, you can avoid this extra cost by using the second loan to cover the down payment and thus reaching the 20% threshold. This can save you thousands of dollars over the life of your mortgage.
Another benefit of a piggyback mortgage is that it can help you qualify for a larger loan amount. By using the second loan to cover the down payment, you may be able to qualify for a larger first mortgage. This can allow you to buy a more expensive home or buy in a more competitive market.
Risks of Piggyback Mortgages
While piggyback mortgages offer benefits, they also come with associated risks. One risk is that the interest rates on the second loan may be higher than those on the first loan. This can result in a higher overall interest rate, which can increase your monthly mortgage payment and the total amount you’ll pay over the life of the loan.
Another risk is that the second loan may have a shorter term than the first loan. This means that you may have to pay off the second loan in a shorter amount of time, which can increase your monthly payments. Additionally, if you are unable to make payments on the second loan, you could risk losing your home.
Obtaining a piggyback mortgage can be challenging compared to traditional mortgages. Lenders may require stricter qualifications, like having a higher credit score and larger down payment for approval.
Is a Piggyback Mortgage Right for You?
Deciding whether a piggyback mortgage is right for you depends on your financial situation and goals. If you have a strong credit score and a sizeable down payment, a traditional mortgage may be better. However, if saving up for a 20% down payment is challenging or you want to avoid PMI, a piggyback mortgage could be a viable option.
It’s important to do your research and shop around for lenders who offer piggyback mortgages. Compare interest rates, fees, and qualification requirements to find the best option for you. Additionally, consider working with a financial advisor or mortgage broker to help you navigate the process and make an informed decision.
Piggyback mortgages can help homebuyers avoid paying PMI and qualify for a larger loan amount. However, they also come with risks like higher interest rates and stricter qualification requirements. So, before making a decision, research and consider your financial situation. By weighing the benefits and risks of piggyback mortgages, you can make an informed decision that’s right for you.