Need a jumbo mortgage but you don't want to pay a jumbo mortgage rate? You might consider a piggyback loan.
A piggyback loan is an arrangement where you use two mortgages, instead of just one, to finance the purchase of a home. The second, smaller mortgage is said to "piggyback" on top of the primary loan.
With a jumbo piggyback loan, you can take out a low-interest conforming mortgage for part of the loan, then a second piggyback loan for the remainder. In some cases, it may also enable you to avoid paying for private mortgage insurance (PMI) as well.
Piggyback mortgages, sometimes called blended mortgages, are much less common than they were a few years ago, when they were a popular type of home financing during the boom years of the last decade. But they still can be a very practical way to save money when buying a home.
The old reason: avoiding PMI and down payments
During the boom years, piggyback mortgages were typically used to avoid or minimize down payments while eliminating the need to pay for PMI. Since PMI is required on most mortgages with less than 20 percent down, lenders would arrange for borrowers to get one mortgage for 80 percent of the purchase price and a second one for 20 percent to cover the down payment, which would "piggyback" on the first.
If the borrower wanted to make at least a partial down payment of 5 or 10 percent, the second loan might be for 10 or 15 percent of the purchase value. For this reason, piggyback mortgage arrangements are often described as "80-20," "80-10-10" or "80-15-5" to describe the ratios of primary mortgage, piggyback loan and down payment.
The jumbo piggyback
Depending on where you live, conforming mortgages backed by Fannie Mae or Freddie Mac will allow you to borrow as much as $417,000 - $625,500. Anything above that is a jumbo mortgage and will charge significantly higher interest rates and fees.
So with a jumbo piggyback, you borrow as much as Fannie or Freddie will allow with a lower-rate conforming loan, then the rest with a second loan at a higher "jumbo" rate.
A few things to note. To qualify for such an arrangement, you're going to need pretty good credit - preferably a FICO score of 740 or above. It's also likely that you'll still have to come up with at least 20 percent down, although down payment requirements have loosened somewhat since the years right after the crash and some lenders may allow you to put down as little as 10 percent.
Depending on how much you're borrowing and what your local conforming loan limits are, your jumbo piggyback could be a 60-20-20, an 80-10-10, a 30-50-20 or whatever proportion you end up with.
Another thing a jumbo piggyback can do is give you additional flexibility with the piggyback portion of the loan. Because the piggyback loan carries a higher rate, some borrowers will opt to pay it off faster than the primary loan.
If the primary loan is a 30-year mortgage, they may choose a 15-year term for the piggyback to pay it off faster and reduce the rate as well. Another option might be to choose an adjustable-rate mortgage (ARM) for the piggyback loan to get a lower rate and then pay the balance down quickly before the rate resets.
Not all lenders are willing to do a piggyback mortgage for a jumbo loan - many of them won't even touch jumbo loans to begin with. But if you can find the right lender who will work with you to explore your various options under this approach, a piggyback jumbo could leave more money in another piggy - your bank account.