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A Smarter Way to Avoid Private Mortgage Insurance (PMI)

Think you need twenty percent down to buy a home? Not always. A piggyback loan lets you use two mortgages at once to finance your purchase.

This strategy helps you skip private mortgage insurance (PMI), lower your upfront costs, and stay below jumbo loan limits. It’s gaining attention as home prices climb.

What Is a Piggyback Loan?

A piggyback loan means taking two loans at the same time to buy a property. The second loan “rides” on top of the first.

The most common setup is called 80/10/10. The first mortgage covers eighty percent, the second covers ten percent, and you put down ten percent.

The second loan is usually a home equity loan or home equity line of credit (HELOC). Some lenders offer 80/15/5 or 80/20 options, too.

How It Works

You apply for both loans together. Each mortgage lender checks your income, credit, and debt ratios separately.

Here’s an example: You buy a $400,000 home. Your first loan is $320,000, your second is $40,000, and you put down $40,000.

Since the first loan is only eighty percent of the home’s value, you avoid private mortgage insurance (PMI). This saves money while keeping your cash needs lower.

Types of Piggyback Loans

A home equity loan gives you a lump sum with a fixed rate. Payments stay the same, which makes budgeting easier.

A home equity line of credit (HELOC) works like a credit line. You can borrow and repay during the draw period. Rates are usually variable and can change over time.

Some buyers use down payment assistance loans from local or state programs. These may have lower rates or partial forgiveness options.

Pros and Cons

Advantages

The biggest benefit is avoiding private mortgage insurance (PMI). That insurance can cost 0.46 to 1.5 percent of your loan amount each year.

You can stay within conforming loan limits, which means better rates and easier approval than jumbo loans.

You need less cash upfront, maybe just five or ten percent down. That frees up money for moving costs or savings.

Your payments build equity instead of going toward insurance premiums.

Drawbacks

You’ll handle two applications, two underwriting reviews, and two sets of closing costs.

The second loan often has a higher interest rate. If it’s a home equity line of credit (HELOC), your payments might increase when rates go up.

Refinancing gets tricky with two loans. The second lender must agree to stay in second position, which can cause delays.

Who Should Consider This?

Piggyback loans work well for buyers with strong credit and steady income who want to avoid private mortgage insurance (PMI) without using all their savings.

They’re popular for homes near jumbo loan limits. Splitting the financing helps you get conventional loan terms.

This option suits buyers who want to keep cash for investments or emergencies. You’ll need to be comfortable managing two loan accounts.

Skip this if you have lower credit, high debt, or plan to refinance soon. The complexity and costs might outweigh the private mortgage insurance (PMI) savings.

Comparing Your Options

A piggyback loan can cost less monthly than a single loan with private mortgage insurance (PMI). But you need to weigh the second loan’s rate and fees against those savings.

Federal Housing Administration (FHA) loans allow low down payments but charge mortgage insurance for the loan’s life. If your credit is strong, a piggyback might cost less over time.

Jumbo loans need higher credit scores and bigger down payments. Using two smaller loans can help you buy a pricier home with easier requirements.

Getting Started

First, check your credit reports and gather income documents. Both lenders review your finances independently.

Look for lenders that offer both loan types. Some handle everything in-house, which simplifies the process.

Compare total costs, not just interest rates. Calculate your combined monthly payment for both loans.

If you’re considering a home equity line of credit (HELOC), understand how variable rates might affect future payments.

Work with a qualified loan officer who can explain how the pieces fit together and what documentation you’ll need.

Is a Piggyback Loan the Right Fit for You?

A piggyback loan offers a flexible path to homeownership. It helps you avoid private mortgage insurance (PMI) and keep your down payment manageable.

This strategy works best when you have good credit, a stable income, and understand the long-term commitment of managing two loans.

Evaluate your situation carefully. Consider your refinancing plans and calculate total costs before deciding.

For personalized guidance, consult with a mortgage professional who can match the right loan structure to your goals.

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Frequently Asked Questions About Piggyback Loans

How to qualify for a piggyback loan?

You need strong credit, a low debt-to-income (DTI) ratio, and verified income. Both mortgage lenders evaluate you separately, so you must qualify for each loan independently.

What are the downsides?

You’ll manage two payments and pay two sets of closing costs. The second loan usually has a higher rate, and refinancing becomes more complex.

Why are they called 80-10 mortgages?

The name describes the structure: eighty percent first mortgage, ten percent second mortgage, and ten percent down payment. This keeps the primary loan below eighty percent to avoid private mortgage insurance (PMI).

Why choose a piggyback loan?

Borrowers use them to reduce upfront costs, eliminate private mortgage insurance (PMI), or avoid jumbo loan limits. It’s a way to buy a higher-priced home without paying premium rates for non-conforming loans.

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