Piggyback Loans – Combo Loans
When most home buyers are purchasing a home without a 20% down payment, they usually find themselves in a situation where they are paying PMI until the loan balance drops below 80% of the home value. However, the PMI payments can be avoided if the piggyback loan option is used instead.
What is a piggyback loan?
Piggyback loans or “combo loans”, are really a second mortgage on top of a primary mortgage to void paying PMI when the down payment is less than 20% of the purchase price. They are also used to keep the first loan below the conforming loan limit.
Who are piggyback loans for?
Piggyback loans are used for the following individuals or situations:
To Avoid Paying PMI – For conventional mortgages, if the down payment is less than 20%, the borrower will be required to pay PMI (private mortgage insurance). PMI payments can potentially be higher than the payment on the piggyback loan.
To Avoid a Jumbo Loan – Conforming loans typically come with a lower interest rate than jumbo loans. The standard conforming loan amount limit for 2019 is $484,350. Anything higher than that is considered a jumbo loan. One way to avoid the higher rate of a jumbo loan is to take out a primary mortgage at the limit of $484,000, then a piggyback or second mortgage for the difference. Doing this will give you the benefit of having a lower interest rate on the first mortgage.
How do piggyback loans work?
When buying a home with a piggyback or combo loan, you will actually apply for two mortgages that will close on the same day. You will likely need to work with the same lender for both loans if you want the process to be seamless.
At the closing table, you will sign two mortgage documents and afterwards will have to make two separate mortgage payments. The interest rate on the second mortgage will be a bit higher than your first mortgage. With this in mind, the idea is to pay down the piggyback loan fast to save on the additional interest.
Each loan is independent of one another and both will need to be paid on time. If you stop making payments on the piggyback loan, the lender can foreclose on your home.
Types of piggyback loans
- 80/15/5 Piggyback Loan – An 80/15/5 means you have a first mortgage of 80% of the purchase price, then a piggyback loan of 15% of the purchase price, then a 5% down payment. This is the most common type of piggyback loan scenario.
- 80/10/10 Piggyback Loan – An 80/10/10 means you have a first mortgage of 80% of the purchase price, then a piggyback loan of 10% of the purchase price, then a 10% down payment.
- 80/5/15 Piggyback Loan – An 80/5/15 means you have a first mortgage of 80% of the purchase price, then a piggyback loan of 5% of the purchase price, then a 15% down payment. This type of piggyback loan scenario is not that common because most borrowers can figure out the additional 5% down payment.
If you are considering a piggyback loan, then complete this loan scenario form and we will help to answer your questions and then connect you with a lender who can help.
Piggyback loan requirements
When applying for a piggyback loan, the requirements will be the same as it would if you were simply applying for one conventional mortgage. These are just a few of the requirements you can expect the piggyback lenders will require.
- Minimum two-year work history
- Fully document your income with tax returns, W2s and pay stubs
- Two months bank statements with a balance high enough to cover the down payment, closing costs and reserves
- A minimum credit score of 600 depending upon the lender
- Copy of the sales contract
If you have any questions about the requirements, just contact us.
Piggyback Mortgage Lenders
These are just a few examples of some piggyback lenders who may be able to help with your mortgage. Depending upon your specific situation, we may recommend a lender that is not on this list. Plus, some of these lenders are only licensed in a few states
- Santander Bank
- Chase Piggyback Mortgage
- Citywide Home Loans
- First American Bank
- Home Point Financial
Let us help you to find the right lender who can help with your piggyback loan scenario. Just complete this short contact form with your scenario and we will contact you.
Pros and cons of a piggyback loan
There are many advantages and disadvantages to using a piggyback or combo loan. These are the most common and they may not all apply to your loan.
- Avoid PMI payments
- Allows for a smaller down payment
- Lower interest rate on the 1st mortgage
- Helps to avoid a jumbo loan interest rate
- Higher closing costs with two loans
- Higher interest rate on the piggyback loan
- More complicated loan process
- Not all lenders offer piggyback loans
- Not attractive to sellers of the home
Piggyback loan interest rates
The interest rates on piggyback or combo loans will be lower on the first mortgage and higher on the second mortgage. There is more risk associated with the second mortgage because in the event of a foreclosure, the first mortgage will have first priority when funds are disbursed.
The interest rate on the piggyback mortgage will likely be at least 1% higher than your first mortgage. However, the rates offered are different for each lender. In some instances, the first mortgage rate may also be slightly higher if a combo loan is being used. Still, the total payments would be less than having one loan with PMI.
Piggyback Loan vs PMI
One of the decisions people will make when they have a small down payment is whether to just pay PMI or to get a piggyback loan. We took you through the pros and cons of a piggyback loan above. The reality is each mortgage and purchase situation is different. The answer whether to go with a piggyback loan or one loan with PMI is something you will have to decide for yourself
If you have a down payment greater than 10% but less than 20%, then you may want to consider one loan with PMI if you can easily get the PMI removed once you paid the loan down below an 80% loan to value. In the end, you will likely save more money doing it this way because you are not also paying the closing costs associated with the piggyback loan.
Alternatives to Piggyback Loans
There are various alternatives to getting a piggyback or combo loan. Each will have different costs, terms and interest rates. You should research all options and make the best decision for yourself.
Gift Funds for Down Payment – You can get gift funds from a relative or close friend to remove the need to have a second mortgage. Lenders will require the donor to sign a letter indicating there is no repayment required. This is the most common way to avoid a piggyback loan.
FHA Mortgage – FHA loans will allow down payments as little as 3.5%. However, they do come with FHA mortgage insurance which can be expensive and must remain in place for the life of the loan. The interest rates on an FHA loan are the lowest available. Read our article on FHA Loans.
USDA Loan – A USDA loan is for the purchase of a home in a rural area. These loans do not require any down payment and may be the best option for you if the home’s address falls into an approved USDA rural area. Read our article on USDA loans.
VA Loan – If you are a veteran, then a VA loan is probably a better option for you instead of a piggyback combo loan. VA loans also have no down payment requirement and therefore no piggyback would be required. Read our article on VA loans.
What are the piggyback loan costs?
The costs of a piggyback loan are the same as your first loan. You will be able to use the same appraisal but since you are closing on two mortgages, you may have to pay some of the other fees twice. This is where the additional expense comes in and some analysis needs to be done. The benefits of the lower piggyback payment can be cancelled by the additional closing costs.
Can I refinance if I have a piggyback loan?
If you have a piggyback loan, you can definitely refinance your first mortgage. This is an excellent strategy to get the piggyback loan removed completely. Meanwhile, if your home has increased in value you may be able to get a home equity line of credit to replace the piggyback loan.
Can a piggyback loan result in a foreclosure?
If you are missing your piggyback loan payments then the lender can foreclose on your home. Missing a mortgage payment is serious and dangerous regardless of whether it is your first or second mortgage.
Can I cancel a piggyback loan?
Piggyback loans can be paid off but not cancelled which makes them different than PMI.
We can help you to find a piggyback mortgage lender in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming