What Is A Piggyback Loan?
A “piggyback” loan is literally a loan that piggybacks off another loan. It’s like two loans that are opened simultaneously. The first loan is generally 80 percent of the purchase price of home. The second is typically a home equity line of credit (HELOC) on top of the first mortgage.
A piggyback loan is sometimes called a “combo loan” which is a type of mortgage that is designed to help you get a more affordable mortgage payment.
There are three ways this type of loan is usually split:
80% of the loan for the purchase of the property and then 15% is taken out as a HELOC or home equity loan. The remaining 5% is put down by the buyer.
80% of the loan for the purchase of the property and then 10% is taken out as a HELOC or home equity loan. The remaining 10% is put down by the buyer. Obviously this depends on what is best for the buyer and how much money they can actually put down.
Pros of a Piggyback Loan
Here are a few reasons why getting a piggyback loan could be beneficial for you:
It allows you to buy with less money down, decreasing spending.
You can avoid paying private mortgage insurance or PMI as part of your monthly payments
These loans can be used to avoid getting a jumbo loan, which can end up costing a lot of money.
Any interest paid on piggyback loan is tax deductible.
Cons of a Piggyback Loan
Here are a few reasons why getting a piggyback loan could be detrimental for you:
The cost of the second mortgage could be much higher than the first mortgage because of the interest rate. Lenders take a bigger risk on the second mortgage, so it can be reflected in the cost.
You’ll have two mortgage payments per month, and it could total more than the costs added by PMI.
Taking out a second mortgage will require you to pay closing costs.
Alternatives to Piggyback Loans
If you look, you can often find alternatives to piggyback loans with the same great benefits. One common alternative is using a homeownership investment from the company of your choice. A homeownership investment is when buyers raise funds from a private company that will give them cash in exchange for equity in their home.
Typically, homeowners will get 10% of the value of the home in exchange for a specific amount of equity, usually around 35 - 50%, in addition to getting their money back. You can increase your purchasing power or get a lower monthly payment with a homeownership investment and without taking on more debt.
Is the Interest Rate on a Piggyback Loan the Same as Others?
Since the piggyback loan is a home equity loan (HEL) or line of credit (HELOC), the rates for these kinds of loans are usually based off the prime rate plus a margin, while 30-year fixed-rate mortgages tend to follow the 10-year treasury rates. If interest rates rise (as they’re expected to do) HELOC rates might rise above those for a fixed-rate first-lien mortgage. Interest rates vary by lender, too.
By calculating the blended rate, which is a weighted average of the interest rates for the two mortgages, you’ll be better able to understand the total cost. HELOC rates do change over time, however, since they’re pegged to the prime rate: so a borrower’s rate is determined by various factors, such as credit score, income and assets, loan balance, and LTV ratio.