A comprehensive guide to understanding piggyback loans, their structure, applications, benefits, types, and special considerations.
A piggyback loan is a type of mortgage that involves combining a construction loan with a permanent loan commitment. Alternatively, it can also refer to a mortgage held by more than one lender, where one lender holds the rights of others in subordination. This financial tool is used primarily in real estate to finance the purchase or construction of property with favorable terms and conditions.
The most common type of piggyback loan, where:
80% of the property’s value is financed with a first mortgage.
10% comes from a second mortgage.
10% is paid as a down payment by the borrower.
Another variation where:
75% is financed with a first mortgage.
15% comes from a second mortgage.
10% is paid as a down payment.
In cases where multiple lenders are involved, one lender may hold the primary lien, and others are subordinated. Subordination agreements prioritize the repayment hierarchy, ensuring the primary lender has the first claim on the property in case of default.
One of the main advantages of piggyback loans is to avoid private mortgage insurance (PMI), which is required when a borrower’s down payment is less than 20% of the home’s value.
A piggyback loan can be structured to finance the construction of a property. Initially, it starts as a construction loan and, once the construction is completed, it converts into a permanent loan commitment.
In high-cost real estate markets, home buyers may use a piggyback loan to avoid higher interest loans and PMI, making homeownership more affordable.
Compared to a single loan, a piggyback loan can provide better terms by avoiding PMI and offering more flexible financing options. However, they come with complications of managing multiple loans and lenders.
A Home Equity Line of Credit (HELOC) can serve a similar purpose but is typically used for secondary financing after purchase, whereas a piggyback is arranged concurrently with the primary mortgage.
A short-term loan used to finance the building of a property.
A long-term loan that replaces previous financing upon completion of the construction phase.
An agreement that ranks one debt below another in priority for collecting repayment from a debtor.