What is a Piggyback Loan and How Does It Help Avoid Jumbo PMI?
A piggyback loan isn't one loan, but two loans used together to purchase one property. The most common structure is the 80-10-10 loan. Here’s how it works:
- 80% First Mortgage: Your primary home loan covers 80% of the home’s purchase price. Because this loan-to-value (LTV) ratio is 80%, you are not required to pay private mortgage insurance (PMI).
- 10% Second Mortgage: A smaller, separate loan covers another 10% of the purchase price. This is often a Home Equity Line of Credit (HELOC) or a fixed-rate second mortgage.
- 10% Down Payment: You contribute the remaining 10% as your cash down payment.
This strategy is a direct workaround for PMI. On a high-value California home, jumbo loan PMI can cost hundreds or even thousands of dollars per month. By keeping the primary mortgage at the 80% LTV threshold, the 80-10-10 structure completely eliminates this expense. The trade-off is that you have two separate monthly mortgage payments and the interest rate on the second loan is almost always higher than the rate on the first.
When Does a Single Jumbo Loan Make More Financial Sense?
While avoiding PMI sounds like an automatic win, a single jumbo loan is often the simpler and sometimes cheaper option. A jumbo loan is a single mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). In most of California, this limit is $766,550, but it can be as high as $1,149,825 in high-cost counties. The data, information, or policy mentioned here may vary over time.
A single jumbo loan might be better in these scenarios:
- Competitive Interest Rates: Sometimes, a lender can offer a single, competitive interest rate on a jumbo loan that results in a lower total monthly payment than the blended rate of two separate piggyback loans, even after factoring in the cost of PMI.
- Simplicity: Managing one loan and one monthly payment is far easier than juggling two. The closing process is also more streamlined with only one set of underwriting standards and one set of closing costs to manage.
- Predictable Payments: If you secure a fixed-rate jumbo loan, your principal and interest payment will never change. In contrast, the second mortgage in a piggyback arrangement is often a variable-rate HELOC, meaning your payment could rise if interest rates go up.
Comparing Total Monthly Payments: Jumbo vs. 80-10-10
The only way to know which option is truly cheaper is to run the numbers. Let’s create a realistic scenario for a home purchase in a high-cost California area. The data, information, or policy mentioned here may vary over time.
Scenario:
- Purchase Price: $1,800,000
- Down Payment: $180,000 (10%)
- Total Financed: $1,620,000
Option 1: Single Jumbo Loan
- Loan Amount: $1,620,000 (90% LTV)
- Example Interest Rate: 6.75% (30-year fixed)
- Principal & Interest (P&I): ~$10,505 per month
- Example PMI: 0.65% of the loan amount annually = $10,530/year or $877.50 per month.
Total Jumbo Monthly Payment (P&I + PMI): $11,382.50
Option 2: Piggyback 80-10-10 Loan
- First Mortgage (80%): $1,440,000
- Example Interest Rate: 7.00% (slightly higher rate for conforming high-balance)
- P&I (1st Mortgage): ~$9,580 per month
- Second Mortgage (10%): $180,000
- Example Interest Rate: 9.25% (higher rate for second lien position)
- P&I (2nd Mortgage, 30-year term): ~$1,480 per month
Total Piggyback Monthly Payment (1st + 2nd): $11,060
In this specific example, the piggyback loan saves over $300 per month. However, a small change in interest rates for any of the loans could easily flip the result. It is critical to get actual quotes for your specific financial profile to make an informed decision.
Are the Qualification Requirements Stricter for a Piggyback Loan in California?
Yes, qualifying for a piggyback loan is often more complex. Instead of meeting the requirements for one loan, you must be approved for two separate loans, often from two different lenders. This means you have to go through the underwriting process twice.
Here’s what that involves:
- Dual Underwriting: Both the first and second mortgage lenders will independently verify your income, assets, credit score, and debt-to-income (DTI) ratio.
- Stricter DTI: Your DTI must be low enough to handle the combined payments of both loans. Lenders will use the total monthly payment from both loans to calculate your DTI ratio, making it harder to stay within their limits.
- Credit Score Minimums: You will need to meet the minimum credit score requirement for both loans. While jumbo loans already require excellent credit, the second mortgage lender may have their own strict standards.
In short, a single jumbo loan application is a single hurdle to clear. A piggyback loan presents two hurdles, which can add complexity and time to the closing process.
How Do Rising Interest Rates Affect the Math?
An environment of rising interest rates typically favors the stability of a fixed-rate jumbo loan. The primary risk with a piggyback loan lies with the second mortgage, especially if it’s a HELOC.
HELOCs almost always have variable interest rates. The data, information, or policy mentioned here may vary over time. If the Federal Reserve raises benchmark rates, the rate on your HELOC will increase, causing your monthly payment to go up. This introduces uncertainty into your budget. A fixed-rate jumbo loan locks in your principal and interest payment for the life of the loan, providing a powerful hedge against inflation and rising rates.
If you choose a piggyback loan with a fixed-rate second mortgage, this risk is eliminated, but the starting interest rate will be significantly higher than a HELOC, making the initial monthly payment less attractive.
Can I Pay Off the Second Mortgage Early Without Penalties?
Yes, one of the biggest strategic advantages of the piggyback loan is the ability to pay off the smaller, higher-interest second mortgage aggressively. Most modern loans do not have prepayment penalties, but you must confirm this in your loan documents before signing. The data, information, or policy mentioned here may vary over time.
By directing extra funds—such as a work bonus, inheritance, or savings—toward the second mortgage, you can:
- Eliminate one of your two mortgage payments entirely.
- Save a significant amount on interest over the life of the loan.
- Build equity in your home faster.
This strategy is ideal for homebuyers who anticipate a significant cash infusion in the near future and want to reduce their monthly housing costs quickly.
What Are the Long-Term Implications for Refinancing?
Refinancing is much simpler with a single jumbo loan. You simply replace your existing loan with a new one at a better rate or term. The process is straightforward.
Refinancing with a piggyback loan structure is more complicated due to a process called subordination. When you refinance your large first mortgage, the lender of the smaller second mortgage must agree to remain in the second lien position. If they refuse to subordinate their loan, you cannot refinance your first mortgage without paying off the second mortgage in full.
While most lenders will agree to subordination, the process involves extra paperwork, potential fees, and added time to your refinance transaction.
Which Structure Is Better for a Property in a High-Cost Area Like San Diego?
There is no one-size-fits-all answer; the best choice depends entirely on your financial situation, risk tolerance, and long-term goals.
A piggyback loan is often better for a San Diego homebuyer who:
- Has a clear plan and the means to pay off the second mortgage within a few years.
- Finds a piggyback rate combination that offers a significantly lower monthly payment than a comparable jumbo loan with PMI.
- Is comfortable managing two separate mortgage payments.
A single jumbo loan is often the superior choice for a buyer who:
- Values simplicity and predictability with a single, fixed monthly payment.
- Plans to stay in the home long-term and wants a straightforward path to refinancing in the future.
- Can find a jumbo loan where the PMI cost is minimal or less than the extra interest paid on a second mortgage.
The key is to compare a legitimate Loan Estimate for both scenarios. Analyze the interest rates, monthly payments, closing costs, and long-term flexibility to make the smartest decision for your California home purchase.
The math for a jumbo vs. piggyback loan is unique to your financial situation and the current market. To see a personalized comparison of rates and total costs for your California home purchase, it’s best to speak with a mortgage strategist who can model both scenarios for you. Apply now to get a clear, personalized breakdown of your options.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
