What Is a Piggyback Loan? How It Works and When It Helps
Piggyback loans pair two mortgages to help you skip PMI, lower your down payment, and build equity faster. Here's how the structure works.
A piggyback loan is a home purchase strategy that uses two mortgages at the same time, usually to keep the first loan at 80% of the home's value and avoid private mortgage insurance, or PMI.
The most common setup is an 80/10/10 loan: 80% from a first mortgage, 10% from a second mortgage, and 10% down from the borrower. Some buyers also use 80/15/5 or similar structures, depending on the property, loan size, and how much cash they want to bring to closing.
For the right borrower, a piggyback mortgage can lower upfront cash needs, help avoid PMI, and sometimes keep the first loan within conforming limits. The tradeoff is that qualifying for two loans usually requires stronger credit, stable income, and enough reserves to satisfy both liens.
What Is a Piggyback Loan?
Before we jump into the benefits of a piggyback loan, it's best to get a quick understanding of how they work first.
Traditionally, a homebuyer would secure a single mortgage to cover the cost of their new home, with the expectation of making a down payment, often around 20% of the property's value depending on the program they secure.
But a piggyback loan lets borrowers reduce or even eliminate the need for a substantial down payment. How? Because, as the name suggests, this type of loan is actually two loans taken out simultaneously to purchase a home.
The primary loan generally covers up to 80% of the home's value, while the secondary loan covers a portion of the remaining cost, whether it's 5, 10, or 15%.
That means borrowers may be able to reduce their down payment to as little as 5% without needing private mortgage insurance (PMI).
Benefits of Piggyback Loans
Piggyback loans may appear complex, but they come with several potential advantages worth understanding. Here's how this financing strategy could benefit qualified borrowers.
Bypassing PMI
One of the biggest advantages of a piggyback loan is the potential to avoid PMI. Typically, if a borrower can't offer a 20% down payment on a conventional loan, the lender requires PMI. While this protects lenders in case the borrower defaults, it adds an ongoing cost to the loan.
PMI costs vary by lender, loan-to-value ratio, and credit profile, but borrowers can review estimated ranges through resources like the Consumer Financial Protection Bureau's guide to PMI. By structuring financing as a piggyback loan, borrowers may avoid this expense altogether, which can lead to meaningful savings over time.
Lower Down Payment
Piggyback loans also pave the way for a potentially lower down payment, which can be a significant hurdle for many borrowers. These loans can reduce the amount needed upfront, freeing capital for other uses.
By using the second loan to cover part of the down payment, borrowers are left with a smaller amount to pay upfront.
It could mean the difference between delaying homeownership and being able to move forward sooner. It could also allow borrowers to reinvest funds into their businesses or diversify their portfolios rather than tie up their wealth in a single asset.
Potentially Lower Interest Rates
Piggyback loans can sometimes yield a lower blended interest rate over time when compared to taking out a larger traditional mortgage that requires PMI.
Even though the second loan in a piggyback structure often carries a higher interest rate than the primary loan, the amount is smaller and can typically be paid off more quickly than the primary loan.
Because the primary loan generally stays within the conforming loan limit set annually by the Federal Housing Finance Agency (FHFA), it may qualify for more favorable pricing than a jumbo loan.
Quicker Equity Build-up
Perhaps one of the most overlooked benefits is the potential for quicker equity build-up due to the structure of a piggyback loan.
Initially, monthly payments may be higher, but there's a silver lining. Once the smaller secondary loan is paid off, the overall mortgage balance decreases, which can support faster equity accumulation.
For example, the secondary loan may carry a 15-year term versus a 30-year term on the primary mortgage. Paying off the secondary loan in roughly half the time of a standard mortgage can help borrowers build equity at a faster pace.
This faster build-up of equity not only means owning a greater share of the home sooner, it can also offer long-term financial flexibility, potentially including the ability to tap into home equity for other uses down the road.
Potential Tax Benefits
Finally, potential tax advantages are worth considering. Depending on the borrower's tax situation, interest on both loans may be deductible, which can create a favorable tax scenario. Deductibility rules for mortgage interest are outlined by the IRS in Publication 936.
It's crucial, however, to consult with a tax professional or financial advisor for guidance tailored to your specific circumstances, since tax laws and benefits can vary and change.
Is a Piggyback Loan Worth It?
A piggyback loan can be a useful option when you want to buy with less than 20% down, avoid PMI on the first mortgage, or keep the first lien within conforming limits. It tends to work best for borrowers with solid credit, documented income, and enough reserves to support two loans.
The right comparison is not just piggyback loan versus PMI in theory. It is the full cost of each option, including monthly payment, cash to close, second-lien pricing, and how long you expect to keep the home. If you want to compare structures for your scenario, explore our piggyback loan program or speak with a loan specialist.
Piggyback Loan Example
Here is a simple example of how a piggyback mortgage can work on a home purchase.
Home price | Amount |
|---|---|
Purchase price | $600,000 |
First mortgage at 80% | $480,000 |
Second mortgage at 10% | $60,000 |
Down payment at 10% | $60,000 |
In this setup, the first mortgage stays at 80% loan-to-value, which may help the borrower avoid PMI on a conventional first lien. The second mortgage fills part of the gap that would otherwise require a larger down payment. Actual loan amounts, pricing, and qualification standards vary by lender and borrower profile.
When a Piggyback Loan May Not Be the Best Fit
You are taking on two monthly mortgage payments instead of one.
The second mortgage often carries a higher rate than the first lien.
Qualification can be stricter, especially for credit score, debt-to-income ratio, reserves, and documentation.
Closing costs may be higher because two loans are being originated at the same time.
If you plan to move or refinance soon, the savings from avoiding PMI may not outweigh the added complexity.
That is why we compare the full monthly cost, cash to close, and expected time in the home before recommending this structure.
What Lenders Look at for a Piggyback Loan
Because a piggyback mortgage involves a first and second lien, underwriting is usually more selective than a single low-down-payment conventional loan. What we look for depends on the program, but the review typically includes:
Credit scores that support both the first and second mortgage
A debt-to-income ratio that fits program limits
Documented income and employment, or acceptable alternative documentation for eligible self-employed borrowers
Cash reserves after closing
The combined loan-to-value, or CLTV, across both loans
Property type and occupancy, since standards can differ for primary homes, second homes, and investment properties
Even when the first mortgage sits at 80% LTV, the second lien still affects the total risk profile because the lender evaluates the combined financing, not just the first loan by itself.
Frequently Asked Questions
What is an 80/10/10 piggyback loan?
An 80/10/10 piggyback loan uses an 80% first mortgage, a 10% second mortgage, and a 10% down payment. Buyers often use this structure to keep the first loan at 80% loan-to-value, which may help them avoid PMI on a conventional first mortgage.
Can a piggyback loan help you avoid PMI?
Yes, in many cases. If the first mortgage stays at or below 80% of the home's value, the borrower may avoid PMI on that first lien. Whether this saves money depends on the second mortgage rate, fees, and how long the borrower expects to keep both loans.
Is a piggyback loan better than paying PMI?
Sometimes, but not always. A piggyback loan can reduce PMI costs, yet it also adds a second loan with its own rate and closing costs. The better option depends on the monthly payment, cash to close, and how long you plan to keep the financing in place.
Do piggyback loans require better credit?
Often, yes. Because the borrower is qualifying for two liens at once, lenders may expect stronger credit, stable income, and reserves. Exact standards vary by program and lender, so the best way to compare options is to review the full file rather than focus on one factor alone.
