What is a “piggyback” second mortgage?
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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 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.
Tip:
If you’re considering a piggyback mortgage, here are some questions to ask yourself:
- 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.
- 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.
Tip:
If you have a problem with your mortgage, you can submit a complaint to the CFPB online or by calling (855) 411-CFPB (2372).
Tip:
If you’re behind on your mortgage, or having a hard time making payments, you can call the CFPB at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counseling agency today. You can also use the CFPB's "Find a Counselor" tool to get a list of U.S. Department of Housing and Urban Development (HUD)-approved counseling agencies in your area.