What is a Piggyback Loan?
A piggyback loan is a type of financing where a borrower takes out two loans simultaneously to cover the cost of a property. This arrangement is often employed to avoid paying private mortgage insurance (PMI), achieve more favorable loan terms, or mitigate the financial burden of a single large mortgage. Typically, the primary loan covers 80% of the purchase price, while the secondary loan covers an additional 10-20%.
Examples
- 80-10-10 Loan: In this arrangement, the primary mortgage covers 80% of the home’s value, the secondary mortgage covers 10%, and the remaining 10% is paid as a down payment by the borrower.
- 80-15-5 Loan: Here, the primary mortgage covers 80%, the secondary mortgage covers 15%, and the down payment is only 5%.
Frequently Asked Questions (FAQs)
What is the purpose of a piggyback loan?
A piggyback loan helps borrowers avoid private mortgage insurance (PMI), which is typically required when the down payment is less than 20%. It also helps borrowers secure more favorable interest rates and manage monthly mortgage payments more efficiently.
How does a piggyback loan work?
A piggyback loan structure typically involves two separate loans: one for 80% of the home’s value and another for 10-20%. Both loans are taken out simultaneously, but they might come from different lenders and have different terms.
Is it harder to qualify for a piggyback loan?
Qualifying for a piggyback loan can be more challenging than qualifying for a single loan, as borrowers must meet the underwriting criteria for two separate loans. This means they need good credit, a stable income, and meet the debt-to-income ratio requirements of both loans.
Are interest rates on piggyback loans higher?
The interest rate on the secondary loan can be higher than the rate on the primary loan. This is because the secondary loan is often considered riskier for lenders.
Can I refinance a piggyback loan?
Yes, borrowers can refinance a piggyback loan. However, refinancing both loans simultaneously can be complex and may require additional qualifications.
Related Terms
Construction Loan
A construction loan is a short-term loan used to finance the building or renovation of a home or other real estate project. Once the construction phase is completed, the loan typically transitions into a permanent mortgage.
Permanent Loan
A permanent loan is a long-term loan used to finance the purchase, construction, or renovation of real estate. It replaces short-term construction financing once the project is completed.
Subordination
Subordination is a process whereby one debt is ranked behind another in terms of priority for repayment. In a piggyback loan context, the secondary loan is subordinate to the primary mortgage.
Online Resources
Suggested Books for Further Studies
- “Real Estate Finance and Investments” by William Brueggeman
- “The Mortgage Professional’s Handbook” by Jess Lederman
- “The Real Book of Real Estate” by Robert T. Kiyosaki
Fundamentals of Piggyback Loans: Real Estate Finance Basics Quiz
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