These floating mortgages have been shunned by borrowers during the pandemic.
What is a piggyback loan?
A piggyback loan is a second loan on top of a conventional mortgage loan that makes it possible to finance a real estate purchase without the need to put down a full 20 percent deposit. The primary mortgage is for 80 percent of the property’s value and the second loan funds the balance of the purchase price less your deposit.
Homebuyers who don’t have sufficient cash for the minimum deposit of 20 percent on the purchase of their home have two options open to them.
If they qualify, they can obtain a loan that’s greater than the 80 percent equity requirement and insure the balance, using private mortgage insurance.
Alternatively, they can obtain a piggyback loan. Although piggyback loan interest rates are higher than rates on conventional mortgage loans, total monthly costs are often lower than for a loan insured by private mortgage insurance.
Piggyback loans, sometimes called combo loans, are made up of two loans:
- A first mortgage based on 80 percent of the purchase price.
- A home equity line of credit that is piggybacked on top of the first mortgage.
Buyers usually need a minimum deposit of 10 percent of the purchase price although some lenders will go as low as 5 percent. The interest rate of the home equity line of credit is higher than that of the mortgage, but in most instances buyers only have to pay the interest, at least for the first 10 years.
This is the primary reason why piggyback loans cost less, and it’s worth considering increasing payments on the second loan so the principal is repaid sooner.
Piggyback loan example
Two sisters, Ruth and Sharon, purchase a condominium located out of town. Because of its great location, units are expensive and they don’t have the $26,000 deposit needed for a conventional mortgage to finance the $130,000 purchase price. As they have $13,000, they apply for a piggyback loan where they put up 10 percent, they get a conventional mortgage loan for 80 percent and a piggyback loan for 10 percent.
Are you planning to buy property, but don’t have enough money for a 20 percent deposit? Use Bankrate’s blended-rate mortgage calculator to see what a piggyback loan costs.