A "piggyback loan" is a home financing option in which a property is purchased using more than one mortgage from two or more lenders.

There are three common types of piggyback loans: the 80-10-10 loan, the 80-20 loan (also known as the 80-20-0 loan) and the 80-15-5 loan. In each of the aforementioned instances, the first number indicates that 80% of the home's purchase price will be financed by a mortgage of lender number one; the second number indicates the percentage amount of a loan secured by a second mortgage with a different lender; and the third number indicates the down payment percentage.

For instance, the popular 80-20 loan is a situation in which 80% of the home loan is financed by one lender, 20% of the loan is financed by another lender and the homebuyer has zero down payment. And an 80-10-10 loan means that 80% of the home purchase price is financed by lender #1, 10% of the purchase price is financed by lender #2 and 10% of the purchase price is paid for in cash by the homebuyer-in the form of a down payment.

The Good News - The Pros

Piggyback loans are used so that homebuyers can qualify for more of a home. When more than one lender is involved in a single loan transaction, the entire loan risk is spread between two lenders. This means that a homebuyer with little or no down payment should have better luck with the loan approval process on a piggyback loan than they would with a single conventional loan.

Yet perhaps the biggest advantage of piggyback loans is that it allows homebuyers to purchase a home with less than 20% down payment. A piggyback lending program tends to level playing field, making homeownership a possibility for more potential buyers-especially first-time homebuyers who have little equity to use as a down payment.

Reasons to Think Twice -The Cons

As compared with standard home mortgage programs, combined rates for piggyback loans are often higher than standard loans. This is because of the risk amounts that each lender is assuming. The lender who is only financing 80% of the loan amount might be willing to drop their rates a bit, but the second lender-the one who is only financing 5% to 20% of the loan-doesn't see much benefit from lending the money unless he can actualize a high interest return.

Also, many piggyback loans attach a large balloon payment at the end of a loan-an end-of-term payment that is substantially larger than the standard mortgage payments. This can be a bit hit, unless you plan ahead by setting aside some extra money every month.

And, since the premise of a piggyback loan is based on the idea of dual mortgages, if an emergency were to arise, getting an additional mortgage or home equity loan could be difficult, if not impossible.

Doing the Math

Which program is right for you will depend on several factors. Consider how much money you have available for down payment. Make sure you sit down with your lender so that you clearly understand your budget before looking for a new home. And when "doing the math" for your own situation, be sure to keep in mind that you'll likely need to cover expenses like earnest money, mortgage insurance and closing costs for the transaction.

For more information, a piggyback loan calculator (found online) can help you pencil out the payment amounts. Or, to find out which program might best suit your needs, talk with your realtor or mortgage professional.

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