A piggyback mortgage is a type of additional or second mortgage that is implemented at the same time that the first mortgage is acquired and started. This type of mortgage arrangement can also take place when an existing mortgage is refinanced and an additional home equity loan or mortgage is acquired simultaneously. One of the benefits of this type of combination loan strategy is that the piggyback mortgage often lowers the loan to value ratio of the primary mortgage to a point that private mortgage insurance is no longer necessary.
The usual approach to using a piggyback mortgage is to create a scheme where 80% of the purchase price is covered by the primary mortgage, a move that normally makes it easier to obtain better interest rates. The piggyback mortgage itself will typically cover an additional 10 percent, leaving the buyer to pay the remaining 10 percent as a down payment. Ideally, the rates applied to the secondary mortgage are no more than slightly higher than the interest rates applied to the primary mortgage, a situation that usually creates less of a financial obligation than carrying the private mortgage insurance that would be necessary otherwise.
The use of a piggyback mortgage strategy is not always the best option. A great deal depends on how the property acquired with the two mortgages appreciates in value. If the buyer suspects that the property will significantly increase in value in a short period of time, that second mortgage may not be necessary, since the loan to value ratio will fall below that 80% mark sooner rather than later. This would mean that paying for the private mortgage insurance during this interim period may actually be more cost-effective than taking out the simultaneous second mortgage, especially if that second mortgage has a higher rate of interest than the primary mortgage.
In situations where there is no short-term anticipation of the property increasing in value, using a piggyback mortgage is probably not the best solution. The idea is usually to render that secondary mortgage obsolete as the property values increase to the point that the primary mortgage accounts for a lower percentage of the current market value. At that point, refinancing the mortgage so that the piggyback loan is retired and the remaining first mortgage is reworked to allow for more agreeable terms becomes a possibility. Without that anticipated increase in market value, there is a good chance that using a piggyback mortgage strategy would cost the buyer more in the long run than simply buying the private mortgage insurance.
