If you want to buy a house, but you can’t afford to put down at least 20%, taking out a piggyback loan might save you money. It’s not the right option for everyone. You’ll have to do some math to figure out if it makes sense for you.
What Is a Piggyback Loan?
If you take out a conventional mortgage and put down less than 20%, you’ll have to purchase private mortgage insurance. That’s meant to protect the lender if you default on the loan. The price of PMI is a percentage of the loan amount and varies by lender. It might add hundreds of dollars per month to your total housing costs.
Another option is to take out a first mortgage for 80% of the purchase price and a piggyback loan for 10% and make a down payment to cover the remaining 10%. The combination of funds from the second mortgage and money you have saved will add up to 20%. That can allow you to avoid paying for private mortgage insurance.
Is a Piggyback Loan Right for You?
Sometimes a piggyback loan saves homebuyers money, and sometimes it winds up costing them more. You’ll have to gather information from several lenders and crunch the numbers to see if a piggyback loan is right for you.
If you take out two mortgages, you’ll have to pay two sets of closing costs. Those fees can vary. They typically add up to thousands of dollars.
Interest rates for mortgages also differ. Rates are usually lower for primary mortgages and higher for piggyback loans since they’re riskier for lenders.
If you take out a mortgage with less than 20% down, you’ll be able to cancel private mortgage insurance once you reach 20% equity. With a piggyback loan, you’ll have to keep making payments until you pay off the mortgage. That might cost you more in the long run than the amount you would have to pay for PMI.
If you want to buy an expensive house that’s worth more than the limits on a conventional loan, you might consider taking out a jumbo mortgage. You’ll have to meet stricter qualification criteria, and you might have to pay a higher interest rate. Get quotes for jumbo mortgages and piggyback loans and compare overall costs to figure out which would work better for you.
Gather Information So You Can Make the Right Decision
Piggyback loans help some homebuyers save money, but they’re not right for every person or every situation. The price of the house you want to buy, the interest rates you qualify for, closing costs and the price of private mortgage insurance will all influence your decision. Request quotes from several lenders, consider various scenarios and compare total costs to figure out which option is right for you.
