Piggyback loan explained: when two mortgages make financial sense

A piggyback loan combines two loans to buy one house:

• The first loan finances most of the home’s purchase price, just like any other mortgage would do.
• The second loan helps pay the down payment on the first loan, reducing the size of the first loan.

Why use two loans when one loan could finance the home? For some borrowers, this creative strategy saves money by eliminating private mortgage insurance or avoiding a jumbo loan’s higher interest rate.

What is a piggyback loan?

With a piggyback loan, the home buyer gets two loans to buy one home. Typically, the primary mortgage loan finances 80 percent of the home’s price. For a home priced at $500,000, the primary mortgage would cover $400,000, leaving $100,000 to be covered by the down payment.

Borrowers who have $50,000 in savings, for example — enough to put 10 percent down — could use a piggyback loan to borrow the other $50,000 needed to make a 20 percent down payment.

The goal? For the borrower to put 20 percent down without using their own cash for the full down payment.
Of course, buyers don’t have to put 20 percent down to buy a house. But paying 20 percent down on a conventional loan eliminates the need for private mortgage insurance, PMI, which could save hundreds of dollars on the loan’s monthly payment.

Making larger down payments may also lower interest rates for some borrowers, depending on their credit score, monthly debt load, and income. Every borrower is different. A pre-approval can show how your finances look to a lender.

...in as little as 3 minutes – no credit impact

How a piggyback loan works

Piggyback loans offer a creative way to lower finance charges on some home purchases.

Piggyback borrowing works kind of like going to the grocery store and splitting the bill between two different credit cards. The groceries still cost the same amount, but splitting the bill between two cards may avoid going over the limit on one of the cards, avoiding extra fees to the purchase.

Just like most grocery shoppers prefer swiping one card at the register, most home buyers, especially first-time buyers, prefer the simplicity of using one loan to buy a home.

Piggyback loans work best for homebuyers who don’t mind taking extra steps and need the savings piggyback borrowing can create.

Piggyback loan structures

The most common type of piggyback loan is the 80/10/10 piggyback.
These three numbers show how much of the home’s purchase price comes from different funding sources:

80/10/10 piggyback

• 80 percent comes from the primary mortgage
• 10 percent comes from the second mortgage
• 10 percent comes from the homebuyer

This structure allows buyers to put 20 percent down on the primary loan without parting with the cash needed for 20 percent down.

Other piggyback formulas include:

80/15/5 piggyback

This structure uses an 80 percent first mortgage, but borrows 15 percent of the 20 percent down payment. This leaves only 5 percent cash responsibility for the buyer, not including closing costs.

Buyers with excellent credit and strong income may choose this strategy to improve their cash flow.

75/15/10 piggyback

This strategy simulates a 25 percent down payment. In this scenario, 75 percent of the property purchase comes from the primary mortgage. Fifteen percent comes from a second mortgage loan. The remaining 10 percent comes from the buyer.
This formula helps investors buy rental properties which often require more money down compared to primary residence loans.

80/20 piggyback

The buyer brings none of their own down payment cash to this transaction. Instead, they rely on a second mortgage, sometimes on a separate property, to fund the full 20 percent down payment.

Someone buying a vacation home could use this strategy. A home equity line of credit (HELOC) on their primary residence could provide the 20 percent down payment on the vacation home.

Types of piggyback loans

Several different kinds of loans can provide the piggyback funding that closes the gap on a property purchase. These include:

Down payment assistance loans (DPA)

First-time buyers may qualify for down payment assistance loans from state agencies or local nonprofits. Some DPA loans are silent second mortgages, meaning they require no monthly payments and can be gradually forgiven if the homeowner stays in the home long enough.
Other DPA loans require monthly payments alongside payments on the primary mortgage. Others, still, require no monthly payments but must be repaid when the borrower sells the home.

Many DPA programs require homebuyer education courses and working with specific lenders.

Home equity loans

Home equity loans resemble smaller versions of primary mortgages. They usually have fixed rates, fixed payments, and terms of 10 to 20 years. Home equity loans typically have higher fixed interest rates than primary mortgages since they’re riskier for lenders.

For example, someone buying a $500,000 home may decide to use a $50,000 home equity loan to piggyback on their primary mortgage of $400,000.

At 6 percent APR over 30 years, this buyer would pay about $2,400 a month in principal and interest on their primary mortgage. They’d pay another $478 each month on the piggyback loan, assuming a fixed rate of 8 percent over 15 years.

Different borrowers qualify for different rates on first and second mortgage loans. The best way to estimate your costs? A pre-approval. Better’s preapproval process can show estimates in as little as three minutes without impacting your credit.

...in as little as 3 minutes – no credit impact

Home equity lines of credit

Home equity lines of credit (HELOCs) can also provide funds for a down payment. Rather than locking in a fixed rate, a HELOC opens a revolving credit account with a variable rate. All, or almost all, of a typical HELOC’s monthly payment covers interest, which can lower monthly costs in the short term.

For example, borrowing $50,000 with a HELOC to piggyback on a primary mortgage, at 9 percent, may require a payment of about $376 a month, about $100 less than using a home equity loan at 8 percent.

The tradeoff? There are a couple: The interest rate could increase, since HELOC rates are usually variable. And this HELOC’s principal balance won’t go down by making interest only payments. This strategy works well for temporary financing of the down payment: A buyer who plans to sell another home soon, for instance.

Related: Use our mortgage calculator to experiment with your loan scenarios.

Pros and cons of piggyback loans

Whether you should use piggyback strategy depends a lot on whether the loan’s advantages outweigh its disadvantages.

Pros of a piggyback loan

• Can avoid PMI: Private mortgage insurance could add a couple hundred dollars to a conventional loan payment. Increasing the down payment to 20 percent eliminates PMI.
• Can lower cash contribution: Putting less cash down leaves more money for closing costs and moving expenses.
• Can increase buying power: Avoiding PMI and keeping more cash in the bank may help some borrowers qualify for a larger primary mortgage
• Can dodge higher rates on jumbo loans: Jumbo loans exceed annual maximum loan sizes for conventional mortgages and usually charge higher interest rates as a result. Piggybacking could push the primary mortgage back into conforming loan limits, saving money on interest.

Cons of a piggyback loan

• Two loans to close and manage: Closing two mortgage loans instead of one will likely increase closing costs. Also, piggyback lending also requires most buyers to make two separate monthly payments.
• Higher rate on second loan: Second mortgages to cover partial down payments typically charge higher interest rates since they’re riskier for lenders. (But the shorter term on the second mortgage can also limit interest costs.)
• Using more equity increases risks: Borrowing more against the home’s value puts borrowers at higher risk of negative equity if home values fall. Historically, home values rise in the long run, but market performance varies by property and location.

How to get a piggyback loan

Two loans instead of one can complicate the borrowing process. These steps can help piggyback borrowers stay on track.

Step 1. Research lenders

Not all lenders can offer piggyback loans, and not all borrowers can qualify for two mortgages at once. So start by finding mortgage lenders that specialize in flexible financing options.

Step 2. Apply for mortgages

Both mortgages in a piggyback formula don’t have to come from the same lender, but each lender must know you plan to use a piggyback strategy.
Online lenders like Better can speed up the application process by using AI and other digital tools.

Step 3. Follow lender directions

Expect to submit documents that show earnings and assets. Loan underwriters will typically ask follow up questions and request documents to clarify your financial situation. Be sure to respond to these requests quickly to keep the loan process on track.

Step 4. Close both loans

Both mortgages in a piggyback loan will need to close on the same day so the home’s seller can be paid the full amount. Depending on your state’s laws, the loans could close at an attorney’s office or a title agency.

Requirements for a piggyback loan

Underwriting rules vary by lender, but piggyback borrowers often need to exceed minimum requirements needed for a single mortgage loan.
For example, piggyback borrowers may need:

• A stronger credit score: A credit score of 680 to 700 may be required to get two mortgages at the same time. Typical conventional loans require FICO scores as low as 620; FHA borrowers using a single loan could qualify with scores as low as 580.
• A lower DTI: DTI, or debt-to-income ratio, shows how much of your income goes toward debt payments. Piggyback borrowers need room in their budget for both monthly payments.
• Healthy assets: Lenders may look for healthy bank account balances which means having enough money to make monthly mortgage payments for a few months to a year if needed.
  Borrowers who don’t fit this profile can often find more affordable mortgages through government-backed programs.

Alternatives to a piggyback loan

Most first-time buyers can’t afford to pay 20 percent down on a home. Instead of borrowing more money to meet that threshold with a piggyback loan, home shoppers can use:

FHA loans

FHA loans exist to help home buyers with small down payments and average credit scores become homeowners. Most buyers who have credit scores of 580 or higher pay only 3.5 percent down. (That’s $10,500 on a $300,000 home.)
FHA can also allow higher DTI limits. In exchange, buyers pay the FHA’s upfront and annual mortgage insurance premiums. A refinance into a conventional loan, later, would eliminate annual fees.

VA and USDA loans

These loans can eliminate the down payment requirement for some borrowers:

• VA loans work for military veterans, active duty service members, and some surviving spouses of veterans. They require no money down and no monthly mortgage insurance.
• USDA loans eliminate down payments for buyers with moderate incomes in rural areas.

USDA loans require upfront and annual fees.

Conventional loans with PMI

Private mortgage insurance gets a bad rap, but along with adding an extra fee each month, PMI lowers borrowing costs by making conventional loans less risky for lenders. For some borrowers, paying private mortgage insurance costs less than the interest charges they’d pay without PMI.

Fannie Mae and Freddie Mac, the two government-sponsored companies that regulate conventional loans, offer special programs for first-time buyers that can lower PMI costs.

Plus, PMI can be canceled once the loan’s balance falls to 80 percent of the home’s value.

Getting a second mortgage on another property

If you’re buying a second home, investment property, or vacation home and already own a primary residence, a home equity loan or HELOC on the primary residence could generate cash on the new home purchase.

This strategy still requires two monthly payments, but it relies less on the new home’s equity which could lower borrowing costs. Plus, there’s no need to close both loans at the same time. The second mortgage could be closed months before the first mortgage.

Piggyback Loan FAQs

Is a piggyback loan one mortgage or two?

A piggyback loan is two separate loans, usually a primary mortgage and a second mortgage or HELOC, taken out at the same time.

Is the second piggyback loan a junior lien?

Yes. The second mortgage is a junior or subordinate lien, meaning it’s paid after the first mortgage balance if the home is sold or foreclosed. Because this is riskier for lenders, second mortgages tend to charge higher interest rates than first mortgages.

How does a piggyback loan eliminate PMI?

Conventional loans need PMI when the home buyer puts less than 20 percent down. By increasing the down payment to 20 percent, piggyback loans can eliminate the PMI requirement on the first mortgage.

When does a piggyback loan actually save money?

Piggyback loans can save money for borrowers who have strong credit scores but still face steep PMI costs. For borrowers who struggle to qualify for a mortgage, piggyback loans may cost more than the extra costs of a lower down payment.

Can a piggyback loan be refinanced?

Yes, both parts of a piggyback loan could be refinanced into a single mortgage loan later. Refinancing charges closing costs and requires borrowers to meet credit and debt-to-income rules.

Is a piggyback loan right for you?

Piggyback loans can help homebuyers who want to increase their down payments without spending their own cash.
These loans also introduce complexity and could add to upfront costs.

A good way to find the right type of mortgage strategy for your next home: a pre-approval. Better’s pre-approval uses a soft credit check which doesn’t lower your credit score.

...in as little as 3 minutes – no credit impact