When you’re looking for the perfect loan for your homeownership aspirations, you might be interested in so-called piggyback loans. Piggyback loans could be great home loan instruments, depending on your circumstances and goals.
However, it’s also crucial to know the possible downsides and alternatives to piggyback loans so you fully understand your options.
The best way to understand piggyback loans is to understand second mortgages. In a nutshell, a second mortgage is a loan enshrined with rights subordinate to an initial or primary mortgage. For instance, if you have two mortgages on your property and you want to sell that home, the first mortgage gets paid off before the second mortgage gets paid off.
Many homeowners use second mortgages to pay off loans and credit card debts or resolve other personal finance issues. Piggyback loans, which can also be called 80/10/10 loans, are a bit different.
With a piggyback loan, the borrower takes out a first and second mortgage loan simultaneously. A borrower might take out a piggyback loan so they don’t have to pay private mortgage insurance (PMI) premiums or high interest rates — or so they can purchase a new home without taking out a jumbo loan.
The first loan in a piggyback loan arrangement will cover 80% of the home’s purchase price covered by a 30-year fixed-rate mortgage without PMI. The second mortgage, the piggyback part of the loan, covers 10% of the home price as a home equity loan, home equity line of credit (HELOC), or similar instrument. Then, the homeowner pays the last 10% of the home price as a cash down payment.
Homebuyers must be aware that piggyback loans often have higher interest rates compared to a standard mortgage loan. The rate is contingent on the loan amount, the home’s value, and mortgage rates in the surrounding market. These second loans may not be the best for first-time homebuyers who are looking for a conventional mortgage.
Though piggyback loans can be attractive, they aren’t available to everyone. You have to qualify for these loan instruments. Plus, the fact that piggyback loans let you finance a huge portion of your home could make eligibility more difficult than you expect.
To qualify for a piggyback mortgage loan, you must usually:
Piggyback mortgage loans are popular mortgage instruments among aspiring homeowners because of their many benefits, including:
As a potential homeowner, you should also recognize the risks and cons of piggyback loans:
Given the potential disadvantages of a piggyback loan, you may want to look into alternatives. You may try qualifying for other types of loans if you want to purchase a property.
FHA loans are backed by the Federal Housing Administration. As government-backed loans, they are secure, so you can sometimes purchase a house with just a 3.5% down payment. Even better, many FHA loans are available for those with low-to-bad credit. You generally need a minimum credit score of 580.
Or, you can look for a VA loan if you are a veteran or actively serving the military. These are backed by the U.S. Department of Veterans Affairs. Unlike FHA loans, you don’t always need a down payment to qualify for a VA loan.
Conventional loans from Fannie Mae and Freddie Mac are other alternatives. These are government-sponsored lenders, so their mortgages are occasionally available for down payments as low as 3%. However, you generally need a good credit score to qualify.
If you're trying to escape high mortgage payments and fees, don't assume a piggyback loan is your only option. If you are considering a piggyback loan just for mortgage stabilization, home co-investment could be a much better idea.
Balance invests in your home in exchange for an ownership interest. As a co-owner, Balance shares in the costs, appreciation, and depreciation of your home. Sharing in your future home appreciation allows Balance to offer affordable terms with low monthly payments and flexible qualifying criteria. For example, Balance has no minimum credit score and qualifies mainly on a homeowner's income and equity.
With your mortgage paid off, you make an affordable monthly payment to Balance and have ongoing access to a portion of your home equity. You retain the right to purchase the equity we invest in without running the risk of foreclosure.
Ultimately, a piggyback loan might work for your needs, but other equity instruments could be better, especially if you’re looking to refinance your loan and secure better payments.
Perhaps you don’t want to juggle the separate loans of a piggyback arrangement. Investing in home co-ownership with Balance could be just what you need to strengthen your finances and enjoy affordable payments for years — all while never giving up ownership. Balance helps create a path back to owning the home on your own by strengthening your finances and improving your credit.
Get in touch with Balance today to learn more!