A piggyback loan, also known as a second mortgage, is a financing strategy used by homebuyers who are unable to afford a large down payment. This type of loan is created in conjunction with the primary mortgage, and it is designed to provide additional funds to borrowers who otherwise might not qualify for a primary mortgage without having to pay for private mortgage insurance. Some of the most significant benefits of a piggyback loan include:
Lower down payment: A piggyback loan can help homebuyers reduce their down payment to 10% or even 5%. This can be a significant savings, especially for those who are cash-strapped or have other financial obligations.
No PMI: By putting down less than 20% in a down payment, homeowners are required to pay for private mortgage insurance (PMI) to protect the lender in case of default. Piggyback loans allow homeowners to avoid this extra monthly payment and save money.
Fixed and flexible payment options: Piggyback loans come in many forms, from home equity loans to HELOCs. Depending on which type of loan you choose, you can have either a fixed or variable interest rate. This flexibility makes it easier for borrowers to budget for monthly payments and choose the loan that works best for their financial goals.
Easier to qualify: Piggyback loans are easier to qualify for than a single large mortgage. This is because the borrower can show that they have two separate sources of financing to purchase the home, which makes them less risky to the lender.
Potential tax benefits: Depending on how the piggyback loan is used, homeowners may be able to deduct some or all of the interest paid on their income taxes. This can help them reduce their taxable income and save even more money.