What is a piggyback loan?

While most people take out a single mortgage to purchase a property, there are scenarios where piecing together multiple loans makes sense. Second home loans — called "piggyback loans" — are often used by homebuyers who want to get into a home with less money down, as well as those looking for creative ways to avoid paying for mortgage insurance.

But how do piggyback loans work? And why would you want two different home loans (and payments) to deal with? The suitability of a piggyback loan depends on your financial situation and the home you want to buy.

Key insights

• Borrowers with low down payment savings use piggyback loans to qualify for mortgages without having to pay for private mortgage insurance.
• Piggyback loans typically come in the form of home equity loans or home equity lines of credit, both of which use the home's equity as collateral.
• Before securing a piggyback loan, consider potential downsides like higher interest rates and having two monthly payments.

How a piggyback mortgage works

Piggyback mortgages are smaller home loans you get alongside your primary mortgage. When you get a piggyback loan, your larger mortgage might make up 80% of your home’s total value, whereas the piggyback loan makes up the remaining amount after your down payment is taken off the purchase price.

According to Jason Lerner, a mortgage loan officer at George Mason Mortgage in Towson, Maryland, piggyback loans and primary home loans are taken out simultaneously when buying a property. This financing strategy can be used for a home purchase or a refinance.

When you have a piggyback loan on top of another home loan, this means you'll have two separate loan agreements and monthly payments, and you will likely have two totally different interest rates.

Why you might want a piggyback loan

There are several reasons to consider getting two home loans at the same time. The two most common reasons are to avoid paying for private mortgage insurance (PMI) and to qualify for or avoid jumbo loans.

How to get a piggyback loan

Because piggyback loans are taken out at the same time as a primary mortgage, and they’re usually taken out to buy a home, one lender takes care of the entire loan process from start to finish. That said, qualification requirements for both loans can vary by lender and the home's purchase price.

Sonja Bullard, a mortgage advisor at Acopia Home Loans in Cumming, Georgia, says that a few factors can impact eligibility for two home loans versus just one. For starters, the higher combined loan-to-value (CLTV) ratio — or the ratio of all secured loans on a property to the value of that property — can cause the interest rate on the first loan to increase.

"This is the larger portion of the loan, so that increases the interest paid," she said. And with higher interest costs, some loan applicants may see the mortgage amount exceed what they can afford.

Bullard also says the piggyback loan often has a variable interest rate that moves with the prime rate. This means the piggyback loan can be more expensive when interest rates are high, and the loan payment can go up over time based on market conditions.

» MORE: Interest rates and how they work

Types of piggyback mortgages

Piggyback loans typically come in the form of a home equity loan or home equity line of credit (HELOC). These two types of loans work similarly because they are secured by the equity in a property, yet there are differences you'll want to understand.

• Home equity loans are like personal loans in that they come with fixed interest rates, fixed payment amounts and a set repayment schedule that will not change. This makes home equity loans a good option for people who want to lock in an interest rate and never worry about their payment increasing based on market conditions.
• HELOCs typically come with a variable interest rate and a fluctuating monthly payment as a result. A HELOC usually has a draw period when you can borrow funds and a repayment period when you can no longer access its credit line.

Since both home equity loans and HELOCs use your home as collateral, your property can be seized through foreclosure if you don't keep up with payments, just like with your primary mortgage.

» MORE: Reverse mortgage vs. home equity loan vs. HELOC

Piggyback mortgage examples

In the following example, a buyer is using a piggyback loan to avoid paying for PMI on a $400,000 property with a down payment of less than 20%.

In this case, the buyer comes up with a down payment of just 10%, uses a piggyback loan for another 10% of the purchase price and takes out a primary mortgage for the remaining 80% of the home's value.

Piggyback loan scenario

• Purchase price: $400,000
• 10% down: $40,000
• Loan term: 30 years

And here's an example of using a piggyback loan to buy a home with a purchase price of $907,200.

In this situation, the buyer is using a piggyback loan to avoid having to take out a jumbo loan and meet the stricter eligibility standards it would require. They avoid a jumbo loan by keeping their primary mortgage just below the conforming loan limit for 2023, which is $726,200.

Piggyback loan scenario

• Purchase price: $907,200
• 10% down: $90,720
• Loan term: 30 years

Piggyback mortgage pros and cons

The benefits of a piggyback loan are pretty straightforward, but you'll also want to consider the downsides of getting two home loans instead of one.

Alternatives to piggyback loans

Before you take out two home loans instead of one, you should know that some types of home loans let you purchase a property with a low down payment or no down payment at all.

• FHA loans come with down payment requirements as low as 3.5%, as well as low closing costs and easy credit requirements.
• VA loans don't have any down payment requirement, but you do have to be an eligible service member, veteran or surviving spouse to qualify.
• USDA loans can be accessed with no down payment, but these loans only apply to eligible properties deemed "rural" by the U.S. Department of Agriculture.

In addition to these options, you can also purchase a home with a down payment below 20% and simply plan on paying PMI for a while. This added cost may seem unnecessary, but remember that PMI won't last forever.

You can request PMI cancellation with your lender after you’ve made enough payments to reach at least 20% equity in your property. Otherwise, your lender will automatically remove your PMI on the date your principal balance is scheduled to reach 78% of the original value of your home.

Bottom line

Piggyback loans are a way of getting around certain mortgage requirements. They can help you avoid PMI on conventional mortgages, and they can help you avoid costly jumbo loans for homes that are priced beyond the FHFA’s conforming loan limits.

You’ll want to ensure that taking out a piggyback loan won’t cost you more than a single mortgage with PMI. A piggyback loan might require you to pay some closing costs twice, and you’ll have two monthly payments to deal with.

If it’s not beyond your budget, it might make more sense to stretch your down payment to 20% rather than take out a piggyback loan. But if you’re unable to make a significant down payment, and avoiding PMI is a priority for you, a piggyback loan could help.