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- An 80/10/10 piggyback loan is a type of loan that involves getting two mortgages at once: One is for 80% of the home’s value and the other is for 10%.
- The piggyback strategy lets you avoid private mortgage insurance or having to take out a jumbo loan.
- Homeowners shopping for a new place can adopt a variation on the piggyback strategy: using a home equity loan/credit line for the second, smaller mortgage.
Home prices are high these days — and when you throw in elevated mortgage rates, the idea of coming up with a down payment and closing costs can seem daunting.
If you don’t have enough in your personal piggy bank for these expenses, you might be a candidate for a piggyback loan. Also called an 80/10/10 or combination mortgage, it involves simultaneously getting two loans to buy one home.
The strategy can save you a lot of money; in fact, it can even make the purchase possible. Here’s how it works.
What is a piggyback loan?
In a piggyback loan, instead of financing a home purchase with a single mortgage, you’re doing it with two, which you take out at the same time: one big loan and a second, smaller one (the piggy on the back, so to speak). The second loan essentially provides funds towards your down payment.
As a result, the piggyback loan eliminates the need for you to pay for private mortgage insurance (PMI) — which normally gets imposed on conventional mortgages when you can’t come up with at least 20 percent in cash.
Additionally, this arrangement can help navigate around some of the stricter requirements of a jumbo loan. A jumbo loan is a mortgage for an amount that exceeds federally-set limits ($766,550 for most of the country in 2024). If you’re eyeing a high-priced property and to borrow more than the “conforming loan limit” for your area, you’ll need a jumbo — normally. But, by separating the financing into two (smaller) mortgages, the size of your loan could avoid falling into the “jumbo” category.
How does a piggyback mortgage work?
In an 80/10/10 mortgage set-up, the first mortgage is for 80 percent of the property’s value, and the second piggybacking one is for 10 percent. The remaining 10 represents the 10 percent down payment that you contribute to the home purchase. (Hey, even with a piggy, you have to come up with some cash).
The 80/10/10 is a common piggyback structure, but it’s not the only one. Lenders also sometimes offer an 80/15/5 arrangement, says Greg McBride, CFA, chief financial analyst at Bankrate, which shrinks your down-payment obligation to just 5 percent.
Types of piggyback mortgages
There are various types of piggyback loans, some of which you’re likely to have heard of before.
- Home equity loan: Home equity loans are a lump sum loan that typically allows existing homeowners to tap into equity they’ve built up in their home. Equity is the amount of your home that you own outright, free and clear of any mortgage loan balance. In the case of a piggyback mortgage, the home equity loan is made at the same time as the mortgage loan you’re taking to purchase a home. The home equity loan becomes a second mortgage — piggybacking onto the first one — and the funds are used to cover a portion of the home purchase.
- Home equity line of credit: A home equity line of credit functions in a similar way as a home equity loan when used as a piggyback or second mortgage. The HELOC would be opened at the same time as the mortgage to purchase a home. The funds from the HELOC would then be used to cover a portion of the home purchase.
- Down payment mortgage: Down payment mortgages function somewhat similarly to piggyback mortgages. It’s a loan that’s earmarked towards all or part of your down payment, and it’s geared towards home buyers who can’t offer the proverbial 20 percent in cash towards the home purchase. Typically this sort of loan comes from a formal down payment assistance program offered through a state housing finance authority; if it does, it often has reasonable interest rates, and may even be forgivable after a few years.
Pros and cons of 80/10/10 mortgage
Pros of 80/10/10 mortgages
- Goodbye, PMI. The main upside to a piggyback loan is the chance to ditch private mortgage insurance. For a conventional loan borrower with 3.5 percent down, the average annual PMI premium ranges from 0.46 percent to 1.5 percent of the loan amount, depending on their credit score, according to the Urban Institute. With a piggyback loan, you can get a reprieve from those insurance payments without having to cough up 20 percent in cash, or to look for a smaller and cheaper home.
- No mumbo-jumbo. Because they’re riskier, non-conforming loans, jumbo loans typically come with the need for a higher credit score, a higher down payment and plenty of cash reserves. If the piggyback arrangement helps keep the financing within conforming limits, you don’t have to worry about the jumbo’s tougher qualifications.
- Less money down. A piggyback loan allows you to contribute much less cash than you normally would — only 10 percent of the purchase price, in the standard 80/10/10 loan scenario. Some lenders will even let you get by with 5 percent of the cost (the 80/15/5 piggyback).
Cons of 80/10/10 mortgages
- Your payments might change. The second piggybacking loan typically has a higher interest rate, and it’s usually variable, McBride says. So if the interest rate goes up, you’ll pay more.
- You have two sets of closing costs. If you take out a traditional second mortgage, you’ll have two bills for closing expenses. That can add up, eating into any potential savings from avoiding PMI.
- You might have trouble with refinancing. If your loans are through two different lenders, refinancing down the road might not be a simple process.
Piggyback mortgage requirements
Piggyback loans might help you get around some of the requirements of a jumbo loan, but they aren’t necessarily easy to qualify for either. The fact that you’re financing such a large percentage of your home purchase can raise red flags with lenders.
Expect to have your personal finances scrutinized to verify that you can indeed pay back both loans. You still need a strong credit score: about 700 or higher, though some lenders might offer them to people with scores as low as 680.
It’s wise to reduce your debt-to-income ratio (DTI) ratio as much as possible before applying, too. You should aim for a DTI of 36 percent or less, including the repayments of both loans. Some lenders might be willing to go a bit higher than that.
Alternatives to a piggyback loan
Piggyback, or 80/10/10 mortgages, were more common 10 to 20 years ago, before a lot of low-down-payment mortgage programs became mainstream, McBride says. If you’re stressing over that 20 percent down payment, there are a number of first-time homebuyer loans and and down payment assistance programs that can help you move into a home for less upfront money without the added layer of a piggyback loan:
- FHA loan – Backed by the Federal Housing Administration, an FHA loan allows you to get away with as little as 3.5 percent down on a home purchase. You can also qualify for this loan with subpar credit. The program requires a minimum credit score of 580 for the 3.5 percent down payment. If your credit score is between 500 and 579, you’ll need to put down 10 percent.
- Conventional 97 – Fannie Mae and Freddie Mac, the two government-sponsored enterprises, offer this sort of mortgage. It’s available with as little as 3 percent down.
- VA loan – If you’ve served or are active in the military, you’re eligible for a loan backed by the U.S. Department of Veterans Affairs, and you don’t have to put any money down to get it.
With a low-down payment program, you’ll be able to write a smaller check, but depending on your lender, also might be required to go back to school. For example, Bank of America’s low-down-payment loan program stipulates that borrowers might need to complete homebuyer education courses, as do many state-sponsored HFA loans. However, investing a few hours of your time is a small price to pay to be able to afford your own place.
You might be pondering delaying a home purchase until you can make a more sizable down payment, but McBride points out that the waiting game can be a losing formula.
“Home prices have been rising faster than people could save, so the idea of making the 20 percent down payment is a moving target,” McBride says. “Especially for a first property, it’s entirely plausible to make a smaller down payment to get into that starter home. Then, after a few years, when you trade up to a more permanent home, you have enough equity that it becomes your 20 percent down payment.”
Piggyback strategy for current homeowners
If you’re trying to sell your current home while buying another one, you can try a different strategy that works quite similarly to a piggyback loan. Rather than getting two mortgages on a new property, you can take out a loan secured by your current home to cover all or part of the down payment on the new one. After the sale goes through, you’ll be able to use the proceeds to pay off the home-secured loan.
For both home equity loans and HELOCs, you need to have paid off or substantially paid down the mortgage on your current home: You have to have built up a significant ownership stake to borrow against, usually at least 20 percent of your home’s current value.
Bottom line on piggyback loans
A piggyback loan can allow you to access homeownership when you might not otherwise be able to do so. It can be helpful if you haven’t been able to squirrel away enough cash for a down payment or your desired home has a price tag above conforming loan limits.
This type of financing can also help you avoid having to pay private mortgage insurance, which is required when you don’t have a 20 percent down payment available for a home purchase.
However, there are downsides to piggyback loans to consider as well, like paying two sets of closing costs for the two loans and potential challenges in the future if you seek to refinance. If a piggyback loan isn’t the right choice for you, consider some of the other options such as FHA and VA loans.
Additional reporting by Mia Taylor