Define Piggyback Loan:

"A piggyback loan, also known as a combo loan or 80-10-10 loan, is a creative financing option used in the real estate industry to help borrowers purchase a home while avoiding the cost of private mortgage insurance (PMI) and making a smaller down payment."

Explain Piggyback Loan:

Introduction

A piggyback loan, also known as a combo loan or 80-10-10 loan, is a creative financing option used in the real estate industry to help borrowers purchase a home while avoiding the cost of private mortgage insurance (PMI) and making a smaller down payment. This two-part loan structure involves combining a first mortgage and a second mortgage, often resulting in more favorable terms for homebuyers.

In this article, we'll delve into the concept, benefits, potential drawbacks, and considerations associated with piggyback loans.

Piggyback Loan Structure

A piggyback loan involves two components:

1. First Mortgage (80%): The borrower obtains a traditional mortgage for 80% of the home's purchase price. This loan is the primary source of financing and typically carries a lower interest rate.

2. Second Mortgage (10%): To avoid the requirement of a 20% down payment and the associated PMI, the borrower takes out a second mortgage for 10% of the home's value. This second mortgage can be structured as a home equity line of credit (HELOC) or a fixed-rate loan.

Benefits of Piggyback Loans

1. Avoiding PMI: One of the primary advantages of a piggyback loan is avoiding the cost of private mortgage insurance, which is typically required when a borrower's down payment is less than 20% of the home's value.

2. Lower Down Payment: Piggyback loans allow borrowers to make a down payment of only 10%, which can be advantageous for those who might not have a substantial amount of savings.

3. Interest Savings: The first mortgage generally carries a lower interest rate compared to a second mortgage or PMI, potentially resulting in overall interest savings.

Drawbacks and Considerations

1. Higher Interest Rate on Second Mortgage: The second mortgage often carries a higher interest rate than the first mortgage, which can increase the overall cost of borrowing.

2. Risk of Default: The second mortgage lender assumes more risk, and if the borrower defaults, the second mortgage holder may face challenges in recouping their investment.

3. Qualification Requirements: Qualifying for a piggyback loan might be more challenging, as lenders may scrutinize the borrower's financial situation and credit history more closely.

4. Potential for Negative Equity: If the value of the home declines, borrowers with piggyback loans could be at a higher risk of negative equity, where the total mortgage debt exceeds the home's value.

Is a Piggyback Loan Right for You?

A piggyback loan might be suitable for borrowers who want to purchase a home with a smaller down payment while avoiding the cost of PMI. However, it's essential to carefully consider your financial situation, ability to manage two loan payments, and the long-term costs and benefits.

Conclusion

Piggyback loans offer an alternative financing option for homebuyers who want to strike a balance between making a lower down payment and avoiding PMI. While they can provide certain advantages, borrowers should weigh the potential drawbacks and carefully assess their financial circumstances before opting for a piggyback loan. Consulting with a financial advisor and mortgage professional can help borrowers make an informed decision based on their specific needs and goals.