What is a piggyback loan? | Smart change: personal finance
Here’s how a piggyback loan works: You take out a mortgage for 80% of the purchase price of the house. However, instead of paying the remaining 20% in cash for a down payment, you take out a second loan, usually at 10%, and then deposit the remaining 10% in cash.
For example, let’s say you want to buy a house for $ 200,000 and you only saved $ 20,000. If you use the piggyback loan strategy, you would take out a mortgage of $ 160,000 (80%). Then you would take out an overlay loan for another $ 20,000 (10%). Finally, you will pay the remaining $ 20,000 (10%) as a down payment.
With this strategy, you take out both loans at the same time. The second smaller loan, which is usually a home equity loan or Line of Credit (HELOC) with a 10-year drawdown period, overlay the first to meet your total borrowing needs.
However, you don’t necessarily have to borrow both loans from the same lender. Let your primary mortgage lender know that you plan to use a piggyback loan and they will refer you to a second lender who can provide you with the additional financing.
Types of piggyback loans
While the above scenario is the most common piggyback loan structure, it is not the only way to distribute the funds. Here is an overview of the two most common options.