Piggyback Loan and Payment Calculator

What is a piggyback loan?

The piggyback loan, also called a tandem loan, combo, or a blended rate mortgage combines a first mortgage and a second mortgage. The piggyback loan is used for eliminating the private mortgage insurance premium when the down payment is less than 20% for a "conventional" mortgage. The piggyback 2nd mortgage cannot be used on the government backed home loans (i.e. FHA, VA, USDA).

Why would I take out two mortgages to buy a house? Sounds crazy, I know.

Here's how the conventional mortgage works. You apply to the mortgage broker or local bank for a conventional loan. The typical down payment on a conventional mortgage is 5%, 10%, 15%, 20% or greater. Although, a 3% down payment mortgage is available (Read more about the 97% loan).

Over the years, lenders have found that when a home is foreclosed on and the property is offered for sale at a foreclosure auction, the bank can usually sell the home at 80% of value and can obtain a quick sale. A home selling 20% below market is an attractive deal for an investor. That's why lenders want a down payment of 20%.

But many home buyers do not have a 20% down payment. Now what? Along comes our friends, the insurance industry. Always willing to help. The insurance companies, called private mortgage insurers, PMI for short, will guarantee the "missing" down payment to the bank. For example, if the borrower can come up with a 10% down payment, the mortgage insurance company will "cover" the "missing" 10% (10% from the buyer + 10% insurance guaranty = 20%), for a fee. Only have a 5% down payment? No problem, the PMI companies will cover the other 15% for just a little bit more each month. Now if the house is foreclosed on, the PMI company will remit the "missing" down payment to the bank and the bank has the 20% cushion that it needs to sell the house, or at least, lose less money.

The private mortgage insurance cost is based on the loan size. The premium is calculated as a percentage of the loan amount, and there are adjustments to the premium percentages. Credit score, property location, and loan size can drive up the rate.

The PMI companies had a good thing going until some smart loan officer or banker came up with the 2nd mortgage idea. Along comes the piggyback mortgage. Make the 1st mortgage 80% of the home value and borrow the missing down payment. Structuring the mortgage with a first and second mortgage is usually cheaper than the PMI cost.

Advantages of a piggyback mortgage

Assuming the combined piggyback payment is lower than a single mortgage payment with PMI, the borrower can borrow more money, which means a more expensive home.

The conventional mortgages have a lending limit. Going higher than the lending limit makes the loan a jumbo loan. Jumbo interest rates are higher than the conventional (conforming) home loans. A piggyback loan can help. Here's an example to keep the first mortgage at the conforming loan limit and the balance as a second mortgage.

One loan with PMII
Sales Price	$700,000
	X 80%
Loan amount = jumbo	$560,0000
Two loans no PMII
Sales Price	$700,000
	X 80%
Loan amount	$560,000
1st mortgage = at limit	$453,100
2nd mortgage	$75,650

Disadvantages of a piggyback mortgagee

It's important to understand how the 2nd mortgage is structured. Is it an adjustable-rate mortgage? If so, the second mortgage payment might change, up or down. Is the 2nd mortgage a fixed-rate loan with a defined loan term (i.e. 15-years) or does the loan "balloon". A balloon loan becomes due in one lump sum after a period of years. That may sound scary, but the solution is to obtain another loan to payoff the balloon payment.

The second mortgage may require additional closing costs.

The credit score may be need to be higher with a piggyback loan.

Frequently Asked Questions About Mortgage Payments

Q. Are mortgage payments paid in arrears?
A. Yes. Mortgage payments are paid in arrears. When you make a loan payment, the interest part of the mortgage payment is based on the previous month.

Q. Can mortgage payments go up?
A. Maybe. If the mortgage payment does not include the property taxes, homeowner's insurance or any other cost and the interest rate is "fixed", then no. However, if the payment includes property taxes, homeowner's insurance, etc., and those costs increase, then yes. Another reason for a payment increase is if the payment is based on an adjustable-rate mortgage. adjustable-rate payments are subject to increases (or decreases) based on the terms of the loan program.

Q. Do mortgage payments affect a credit score?
A. Mortgage payments do affect credit scores. A mortgage payment is a strong indicator of credit wordiness. Making mortgage payments "on time" will strengthen your credit score. Late mortgage payments work against you.

Q. Do mortgage payments increase with inflation?
A. adjustable-rate mortgages may be influenced by inflation. A fixed-rate mortgage is immune to inflation

Q. Do mortgage payments include taxes?
A. Most home loans include the real estate taxes.

Q. How many mortgage payments can I miss?
A. Don't miss even one mortgage payment. The mortgage payment history is a significant factor in your credit score.

Q. When do mortgage payments start?
A. The first mortgage payment is due the second month after closing. For example, if you close in January, the first mortgage payment is due in March. Close in March, the first payment is due in May. Think of interest like your water bill. After you consumed the water, the water company bills you for the water. The reason that you "skip a month" is because you consumed the interest on the mortgage for the previous month.