The Secret Behind Piggyback Loans: How to Avoid PMI and High Rates

Buying a house these days requires a great deal of creativity. With so many regulations, not to mention hidden costs interwoven into those regulations, it can oftentimes require some innovative thinking and financial wrangling to make the numbers work so  that you can buy that house you’ve been dreaming of.

One of the most creative ways for potential homebuyers to purchase a home these days is by utilizing what is known as a piggyback mortgage, aka a piggyback loan. A piggyback mortgage is essentially a second mortgage, or home equity loan, that is taken out by a borrower at the same time as their first mortgage.

The purpose of a piggyback loan is to help a homebuyer avoid various extraneous obligations that come along with taking out a large home mortgage loan. The following are the most notable benefits of taking out a piggyback loan.

• Avoid a Jumbo Loan – A piggyback loan is perfect for homebuyer who wants to buy a house, but the amount of the mortgage they need exceeds loan limits within their given county. Existing loan limits are dictated by Fannie Mae and Freddie Mac and can be found here. Normally, a homebuyer would have to take out a non-conforming mortgage known (aka jumbo loan) if the total mortgage exceeded the loan limits within the county, but that’s not the case with a piggyback loan. By breaking up the mortgage amount into two loans, a homebuyer can avoid the high interest rates that come along with jumbo loans.

• Avoid Private Mortgage Insurance (PMI) – PMI is typically required of homebuyers who put less than 20% down payment on a mortgage loan. This is not the case, however, if you break the mortgage up into a first and second mortgage. To learn more about private mortgage insurance.

Here’s how piggyback loans work!

Let’s say you want to buy a $500,000 home. You plan on putting 10% or $50,000 as a down payment, meaning the amount of the mortgage you will need is actually $450,000. If you’re buying a house in a county with a loan limit of $417,000, then that means you’ll need to take out a jumbo loan. As mentioned earlier, a piggyback loan can help you avoid having to do this altogether.

A savvy mortgage broker will recommend you do a combination loan that allows you to essentially break up the total cost of the home into a down payment, a first mortgage and a piggyback loan. This allows you to obtain a mortgage(s) that is below the county loan limit, and thereby avoid having to get a jumbo loan.

One of the most common types of piggyback loans involves the ’80-10-10’ strategy. This approach has you taking out a first mortgage that reflects 80% of the home price and then has you putting 10% of the mortgage value as a down payment, and then taking out a second mortgage (piggyback loan) that reflects the remaining 10% of the home price. In the above scenario involving the $500,000 home, the break down would look like this:

• $50,000 down payment (10%)
• $400,000 first mortgage (80%)
• $50,000 piggyback mortgage (10%)

So as you can see, a piggyback loan is a perfectly acceptable way to purchase a home without the hassle of having to take out a jumbo loan, pay higher interest rates and pay PMI.

Blue Water Mortgage specializes in finding creative ways of helping its clients get the home of their dreams. Contact us today if you’re interested in talking about this and other innovative approaches to purchasing a home. Our team of professional mortgage brokers is always willing to help.

Roger Odoardi

Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.