The piggyback 2nd mortgage is a small loan used in tandem with a first mortgage in order to help the buyer of a home avoid out of pocket expenses. Like other somewhat exotic mortgages, the piggyback loan should be used wisely and viewed with a modicum of caution and prudence.

A piggyback loan is essentially a second mortgage that rides on top of a homeowner's main mortgage-hence, its cute name. When taking out a primary mortgage, the borrower simultaneously secures a smaller piggyback 2nd mortgage. Additional income and higher credit are usually necessary in order to qualify for such additional borrowing. On the plus side, the interest on it may be tax-deductible, just as it is with other kinds of mortgage payments.

Reasons for use

Piggyback 2nd mortgages are typically used for two main reasons:

  • When the buyer doesn't want, or is unable, to come up with a large enough down payment, the lender will sometimes assist by offering the piggyback loan to help pay the balance. A buyer might do this to avoid paying PMI insurance, or to minimize out-of-pocket expenses at closing.
  • The other popular use for the piggyback second mortgage is to avoid the added expense of a jumbo loan. These more expensive mortgages are made for amounts that exceed the caps on conventional loans-currently in excess of $417,000. To avoid taking out a jumbo loan, a buyer might use a piggyback to borrow just enough to reduce the first mortgage down below the jumbo's level.

If a purchase required $420,000-which is jumbo territory-the strategy might involve, for example, taking out a $5,000 piggyback second mortgage, effectively reducing the main loan to $415,000, and thereby qualifying it for a less expensive mortgage rate.

Piggyback 2nd mortgage less desirable

These days, piggybacking doesn't have the advantages it used to, because Fannie Mae is now authorized to guarantee many jumbo loans. That makes them more affordable without the need for piggyback strategies. PMI is also tax deductible-at least for now-so that removes another compelling reason to use a piggyback. Last but not least, the mortgage crisis has put the brakes on small down payments, and has also made it impossible to refinance many first mortgages without first paying off the second mortgage. These changes make piggybacks less attractive and more inconvenient.

Mortgage lenders love to use their own descriptive terminology when naming products, and the piggyback second mortgage is a perfect example of that. But getting overly creative when it comes to loans that are secured by one's home can be risky. Millions of homeowners who took out loans with quirky and exotic names a few years ago are now, to their dismay, discovering the dangers in such creativity. Before attempting to use a piggyback second mortgage, give it a second thought. Then, proceed only if it makes good financial sense without unnecessary risk.

Published on September 1, 2008