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At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. If you’re starting to think about , coming up with a down payment and closing costs can seem daunting, particularly with today’s rising home prices. If you don’t have enough in your personal piggy bank for these expenses, you might be a candidate for a piggyback loan. What is a piggyback loan
A piggyback loan, also called an 80/10/10 or combination mortgage, involves getting two mortgages at the same time: one for 80 percent of the home’s purchase price and another for 10 percent, with the remaining 10 percent covered by your funds for a down payment. A piggyback loan eliminates the need for you to pay for . Additionally, this arrangement can help navigate around some of the stricter requirements of a : By separating the transaction into two mortgages, you could avoid falling into the “jumbo” category. There’s one other big reason a piggyback loan can be a help in today’s market: If you’re trying to sell your current home while buying another one, you can take out a home equity loan or a home equity line of credit (HELOC) on your current home to cover part of the down payment on the new one. Assuming you can sell your existing property, you’ll be able to use the proceeds to pay off the loan. How does a piggyback loan work
In an 80/10/10 setup, the first mortgage is for 80 percent of the property’s value, and the second — the piggy on the back, so to speak — is for 10 percent. Then, as the borrower, you’ll need to make a 10 percent down payment. Lenders also sometimes offer an 80/15/5 loan, says Greg McBride, CFA, chief financial analyst at Bankrate, which shrinks your down payment obligation to just 5 percent. Types of piggyback loans
Piggyback loans come in a few different flavors: Taking out a : In a traditional piggyback loan, you’ll have two mortgages. That means two sets of closing costs with two different sets of terms. It might even mean using two different lenders. : If you’re currently living in a home that you’ve paid off (or paid down substantially with your mortgage), you can take out a home equity loan, a lump sum of cash that you can put on the back of a mortgage for 80 percent of the purchase price. : A HELOC is similar to a home equity loan, except that the rate on a HELOC is variable, so your monthly payments can change, and you’ll draw down funds rather than take out a big chunk at one time. Pros and cons of piggyback loans
Pros
You can eliminate mortgage insurance premiums. The main upside to a piggyback loan is the chance to . For a conventional loan borrower with 3.5 percent down, the average annual PMI premium ranges from 0.58 percent to 1.86 percent of the loan principal, depending on credit score, according to . With a piggyback loan, you can get a reprieve from those insurance payments without having to look for a smaller and cheaper home. You can avoid jumbo loan requirements. Jumbo loans typically come with the need for a higher credit score, a higher down payment and plenty of cash reserves. If the piggyback arrangement helps keep the loan within conforming limits, those requirements will not apply. You can make a lower down payment. While the most common down payment of a piggyback loan is 10 percent of the purchase price, you might be able to find an 80/15/5 setup, meaning your down payment would be just 5 percent of the cost. Cons
Your payments might change. A piggyback loan still costs money. The second loan typically has a higher interest rate, and it’s variable, McBride says, so if the interest rate goes up, you’ll pay more. You still have two sets of closing costs. If you take out a traditional second mortgage, you’ll have two bills for closing. That eats into any potential savings from avoiding PMI. You might have trouble if you need to refinance. If your loans are through two different lenders, refinancing down the road might not be a simple process. Why qualifying for a piggyback mortgage can be more difficult
Piggyback loans might help you get around some of the requirements of a jumbo loan, but these are by no means easy approvals, either. You still need an excellent credit score, and the need to borrow more money can raise eyebrows from lenders. Expect to have your personal finances scrutinized to verify that you can indeed pay back both loans. If you’re thinking about trying to get a piggyback loan, it’s wise to reduce your debt-to-income (DTI) ratio as much as possible before applying. Alternatives to a piggyback loan
Piggyback loans were common before a lot of became mainstream, McBride says. If you’re stressing over that 20 percent down payment, there are a number of and grants that can help you move into a home for less upfront money without the added layer of a piggyback loan: – Backed by the Federal Housing Administration, an FHA loan allows you to get away with as little as 3.5 percent down on a home purchase. You can also qualify for this loan with subpar credit. The program requires a minimum credit score of 580 for the 3.5 percent down payment. If your credit score is between 500 and 579, you’ll need to put down 10 percent. Conventional 97 – Fannie Mae and Freddie Mac, the two government-sponsored enterprises, help make mortgages available with as little as 3 percent down. VA loan – If you’ve served or are active in the military, you’re eligible for a loan backed by the U.S. Department of Veterans Affairs, and you don’t have to put any money down to get it. With a low-down payment program, you’ll be able to write a smaller check, but depending on your lender, also might be required to expand your home-buying knowledge. For example, Bank of America’s low-down payment loan program stipulates that borrowers might need to complete . However, investing a few hours of your time is a small price to pay to be able to afford your own place. You might be pondering delaying a home purchase until you can make a more sizable down payment, but McBride points out that the waiting game can be a losing formula. “Home prices have been rising faster than people could save, so the idea of making the 20 percent down payment is a moving target,” McBride says. “Especially for a first property, it’s entirely plausible to make a smaller down payment to get into that starter home. Then, after a few years, when you trade up to a more permanent home, you have enough equity that it becomes your 20 percent down payment.” Learn more
SHARE: Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Related Articles