What is a “piggyback” second mortgage?

A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage. Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.

Typically, borrowers with a down payment of less than 20 percent of the home’s price will need to pay for mortgage insurance. For example, a borrower that can afford a 10 percent down payment would typically pay for the first 10 percent of the home’s price with their down payment, and the remaining 90 percent of the price with a mortgage that requires mortgage insurance.

When using a “piggyback” mortgage, lenders structure the loans differently.  For example, the same borrower might pay for the home with: a 10 percent down payment, 80 percent main mortgage, and a 10 percent “piggyback” second mortgage. In this scenario, the borrower is still borrowing 90 percent of the value of the home, but the main mortgage is only 80 percent.  The “piggyback” second mortgage typically carries a higher interest rate, which is also often adjustable. These programs are offered under a variety of lender-specific brand names but follow the same basic structure.

The “piggyback” structure was common during the mortgage boom in the early to mid-2000s. It is rare today but could return. Under the rules during the mortgage boom, borrowers did not have to pay for mortgage insurance with an 80 percent main mortgage.

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If you’re considering a piggyback mortgage, here are some questions to ask yourself:

  1. Is the piggyback structure really cheaper? Consider the cost of both the main mortgage and the piggyback mortgage. Ask to see a quote for the same loan structured as a single loan with mortgage insurance, and compare total costs.
  2. Will the piggyback structure make it more difficult to refinance your mortgage later? It can be trickier to refinance a mortgage if you also have a second mortgage because the second mortgage lender has to agree to the refinance (unless you are able to pay off the second mortgage with your refinance loan).  Getting two lenders to agree to a refinance can be particularly difficult if your home value has declined or if you are behind on your payments and need a loan modification. It may also be harder to sell your home and pay off your mortgages if the value of the home has declined.

Source: CFPB: www.consumerfinance.gov

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