Piggyback loans

Piggyback mortgage is a type of mortgage wherein you take out a home equity loan or a second mortgage at the same time when you take out the first mortgage or get it refinanced. Piggyback mortgage are mainly used to reduce the LTV or the loan-to value ratio and thereby reduces the necessity of paying for PMI or private mortgage insurance. Piggyback mortgages gained prominence prior to 2007. These were used as tax deductible alternative to conventional private mortgage insurance premiums.

How do piggyback mortgages work?

If you are planning to buy a home and intend to borrow 80% of purchase price of the property, you may opt for the conventional mortgage and thereafter pay private mortgage insurance or avail LPMI or lender-paid mortgage insurance. Piggyback mortgage insurance can also be the answer to your needs. Piggyback Mortgage is also referred to as 80/20 loan. It is a combination of a primary mortgage taken against 80% of your home value and a second loan worth the remaining equity in your home.

In case you avail primary as well as second mortgages from the same lender, you will have to pay closing cost for one. On the other hand, if you are availing the first as well as the second mortgage from 2 different lenders, you are required to pay closing costs to both of them.

The (80%) primary loan will not require any insurance and can be availed at an adjustable rate or a fixed rate. As far as interest rate on the second mortgage is concerned, you may have to make payments as per higher interest rate.

One of the main advantages of piggyback loans was that interest on these loans was tax deductible whereas in case of private mortgage insurance premiums, they were not. However, during 2007, the piggyback loans started defaulting and delinquencies increased manifold. When price of homes dropped, there was almost no equity that could render protection to many second loans.