Most lenders require a down payment equal to at least 20 percent of the purchase price for a conventional loan. Anything less and you’ll have to pay private mortgage insurance (PMI).
But what if you don’t have the funds to put down 20 percent? One option is a piggyback mortgage.
Three parts, one mortgage
Also called an 80-10-10, the piggyback mortgage is made up of three things. There’s the first or main mortgage loan, which is usually for 80 percent of the sales price. The next piece is a second mortgage for 10 percent of the sales price. It’s also referred to as a second mortgage, home equity line of credit or home equity loan. The final part is your 10 percent down payment.
The good and the bad
You already know that a piggyback mortgage can help you avoid PMI on your loan. So, what’s the disadvantage of this type of loan?
You’ll pay closing costs on both loans. Also, the second loan will have an adjustable rate that’s likely to be higher than the first loan’s rate, so climbing rates will hit your checkbook. Piggyback mortgages usually require a high credit score than other low-down payment options, such as a Federal Housing Administration loan. But these disadvantages can be overcome with some careful planning and the counsel of your lender.
A piggyback mortgage isn’t right for everyone — each borrower’s situation is unique. However, it’s a great option to consider if you’re a strong mortgage candidate who’s a short on the down payment.