Real Estate

Piggyback loans consist of a first loan for 80% of a home's value with a second loan for up to 20% more of the home's value. Here are some pros and cons.

Piggybacks and mortgage insurance are two common ways of getting a home loan with a down payment of less than 20 percent. When a buyer borrows more than 80 percent of the home’s value, lenders deem that loan riskier. Some lenders cushion themselves from that risk with mortgage insurance, which reimburses the lender for costs associated with foreclosure. The lender is the beneficiary of a mortgage insurance policy, and the borrower pays the premiums.

A few years ago, lenders began marketing piggyback mortgages aggressively. A piggyback loan works this way: You get two home loans _ a primary mortgage for 80 percent of the purchase price, and a higher-rate secondary mortgage (the piggyback loan) for the rest of the borrowed amount. Piggybacks appeal to homeowners because the combined monthly payments usually add up to less than the monthly payments on a single loan with mortgage insurance.

Having to pay closing costs for two loans erases some of the advantage of piggybacks, but they still tend to be cheaper in the short run. What about the long run? The answer differs for each homeowner’s situation because it depends on the interest rates, the pace of home appreciation and the length of time the borrower plans to own the house. Ask the mortgage lender or broker to give you a side-by-side comparison, possibly with the help of a calculator on the Web site of the Mortgage Insurance Companies of America, the industry’s trade group.

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