Piggyback Loans (80-10-10) Explained: How to Avoid PMI With Less Than 20% Down
A piggyback loan uses two mortgages at once to help a buyer avoid private mortgage insurance without making a full 20% down payment. The most common version is called an 80-10-10 loan.
Official Source: Consumer Financial Protection Bureau (CFPB) — "What Is Private Mortgage Insurance?" — https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/
According to the CFPB, PMI is typically required when a borrower takes out a conventional loan with a down payment below 20%. A piggyback loan gets around this by splitting the financing into two loans, keeping the primary mortgage right at 80% of the purchase price. This guide explains how the structure works, what it costs compared to PMI, and when it actually makes financial sense.
Table of Contents
- Definition
- How the 80-10-10 Structure Works
- Why Borrowers Choose a Piggyback Loan
- Piggyback Loan vs. PMI: Cost Comparison
- Qualifying for a Piggyback Loan
- Other Piggyback Loan Structures
- Step-by-Step: Deciding Between a Piggyback Loan and PMI
- A Real-World Example
- Common Mistakes
- Expert Tips
- Related Calculators
- Frequently Asked Questions
- References
- Conclusion
Definition
A piggyback loan, most commonly structured as an 80-10-10 loan, combines a primary mortgage covering 80% of the home's purchase price with a second mortgage covering 10%, plus a 10% down payment from the buyer.
How the 80-10-10 Structure Works
The name describes the three pieces of financing. The first mortgage covers 80% of the purchase price and stays at a loan-to-value ratio low enough to avoid PMI. The second mortgage, often a home equity line of credit, covers 10%. The buyer's own down payment covers the final 10%. Together, the buyer is financing 90% of the home's value, but because the primary mortgage itself stays at 80% LTV, no PMI is required on that first loan.
Why Borrowers Choose a Piggyback Loan
Buyers typically consider a piggyback structure for a few reasons:
- To avoid the monthly cost of PMI on the primary mortgage.
- To keep the primary loan within conforming loan limits, avoiding a more expensive jumbo loan.
- To potentially qualify for a lower interest rate on the primary mortgage, since a lower loan-to-value ratio can reduce lender risk.
- To preserve cash for closing costs or moving expenses while still simulating a 20% down payment.
Piggyback Loan vs. PMI: Cost Comparison
| Factor | Piggyback Loan (80-10-10) | Standard Loan With PMI |
|---|---|---|
| Number of Loans | Two (primary + second mortgage) | One |
| Monthly Insurance Cost | None on the primary loan | PMI typically 0.3%–1.5% of loan amount annually |
| Second Mortgage Rate | Often higher and adjustable | Not applicable |
| Cancellation | Second mortgage can be paid off anytime | PMI can be canceled once reaching 80% LTV |
| Best For | Borrowers planning to pay off the second loan quickly or stay long-term | Borrowers expecting to reach 20% equity within a few years |
The right comparison isn't simply "PMI or no PMI." It's the total monthly cost of the primary loan plus PMI versus the total monthly cost of the primary loan plus the second mortgage payment.
Qualifying for a Piggyback Loan
Piggyback loans are generally harder to qualify for than a single mortgage, since you're applying for two loans simultaneously. Lenders typically look at:
- Credit score requirements for the second mortgage, which are often stricter than for the primary loan.
- Combined debt-to-income ratio, factoring in payments from both the primary and second mortgage.
- Whether the second mortgage lender will approve financing behind an existing first mortgage lien.
- Simultaneous closing coordination, since both loans typically need to close at the same time.
Other Piggyback Loan Structures
While 80-10-10 is the most common structure, other combinations exist. A 75-15-10 structure is sometimes used for condos, which often qualify for lower rates when the primary loan stays at 75% LTV. Borrowers buying above the conforming loan limit sometimes use a similar strategy to keep their primary mortgage within conforming limits and avoid a jumbo loan entirely.
Step-by-Step: Deciding Between a Piggyback Loan and PMI
- Calculate the monthly PMI cost for a single loan at your expected down payment and credit score.
- Get a quote for a second mortgage's rate and payment under an 80-10-10 structure.
- Compare the two total monthly costs side by side.
- Estimate how many years you expect to keep the loan or take to reach 20% equity.
- Factor in whether the second mortgage carries an adjustable rate that could rise over time.
- Confirm you can qualify for both loans simultaneously before committing to the piggyback structure.
A Real-World Example
A buyer purchasing a $500,000 home with $50,000 available uses an 80-10-10 structure: a $400,000 first mortgage, a $50,000 second mortgage, and a $50,000 down payment. This keeps the first mortgage at exactly 80% LTV, avoiding PMI. If the second mortgage payment is lower than what PMI would have cost on a single 90% loan, the piggyback structure saves money each month, at least until the second loan is paid off or PMI would have otherwise been canceled.
Common Mistakes
- Assuming a piggyback loan is automatically cheaper than PMI without comparing the actual monthly costs.
- Not accounting for the second mortgage's often adjustable rate, which can rise over time.
- Underestimating how much harder it is to qualify for two loans simultaneously versus one.
- Forgetting that PMI is temporary and can be canceled, while the second mortgage remains until paid off.
- Not asking whether the same lender can originate both loans, versus needing two separate lenders.
Expert Tips
- Run the numbers on both PMI and a piggyback second mortgage before choosing either option.
- Ask whether the second mortgage rate is fixed or adjustable, since a rising rate could erode any initial savings.
- If you expect to reach 20% equity within two to three years, a single loan with cancelable PMI may end up cheaper.
- Confirm your combined debt-to-income ratio comfortably fits both loan payments before applying.
Related Calculators
Related Articles
Frequently Asked Questions
Is a piggyback loan always cheaper than PMI?
Not necessarily. It depends on the second mortgage's rate and how long you keep it compared to how quickly you'd reach 20% equity and could cancel PMI on a single loan.
What type of loan is typically used as the second mortgage in an 80-10-10?
A home equity line of credit (HELOC) is the most common choice, since it offers flexibility to pay down the balance faster when extra cash becomes available.
Do I need two different lenders for a piggyback loan?
Not always. Some lenders offer both the primary and second mortgage directly, or have established relationships with a second lender to streamline the process into one transaction for the buyer.
Can a piggyback loan help me avoid a jumbo loan?
Yes, in some cases. Keeping the primary mortgage within conforming loan limits through a piggyback structure can help a buyer qualify for a conforming loan instead of a more expensive jumbo loan.
References
- Consumer Financial Protection Bureau – What Is Private Mortgage Insurance?
- Consumer Financial Protection Bureau – When Can I Remove PMI From My Loan?
- Federal Housing Finance Agency – Conforming Loan Limit Values
Conclusion
A piggyback loan can help buyers avoid PMI and possibly qualify for a lower rate, but it isn't automatically cheaper once you factor in the second mortgage's own rate and closing costs. Comparing the true monthly cost of both options, and being realistic about how long you'll keep each loan, is the only reliable way to know which structure fits your situation. This article is educational only and not financial advice; loan terms, qualification standards, and costs vary by lender, so consult a licensed mortgage professional before choosing between a piggyback loan and PMI.