What is a Piggyback Loan?

If you are trying to buy a house but don’t have the money for a down payment, you might have heard friends or mortgage brokers suggest a piggyback loan. But what is a piggyback loan?

 

Essentially, a piggyback loan is where you have two mortgages on the same house, with one “piggybacking” the other. Also known as a combo loan or a combination loan, a piggyback loan allows you to finance 100 percent of your home’s purchase price, so that you don’t have to put any money down on it.

 

Before piggyback loans became an option, if you weren’t putting down at least 20 percent of the total purchase price, you had to buy mortgage insurance -- which, as you can imagine, is an expense most homebuyers would rather do away with. But who has 20 percent of a home’s price in saving anymore? Even if we’re talking about a home in an inexpensive area, that can still be around $20,000 -- almost as much as the person buying that home probably makes in a year. In more expensive areas, you might be looking at a $60,000 or $80,000 down payment.

 

Piggyback loans allow homebuyers to finance the entire cost of the house without having to get mortgage insurance. One loan is typically for the usual 80 percent of the house’s price, but instead of making a down payment, the buyer then finances the other 20 percent with a second loan.

 

There are of course downfalls to this setup. Your combined mortgage payments will be higher, for one thing, as you are paying interest on 100 percent of the home’s price. Also, you may find that your interest rates are slightly higher than if you were able to front the down payment yourself. However, piggyback or combination loans are an excellent solution for people who can’t afford the down payment on a house, but still want to be homeowners without the extra expense of mortgage insurance.