What is a piggyback loan designed to achieve?

A piggyback loan is primarily designed to pair a second mortgage with an underlying first mortgage. This financial strategy is often used by homebuyers to avoid private mortgage insurance (PMI) when their down payment is less than 20% of the property's purchase price. By taking out a piggyback loan, borrowers can finance a portion of their home purchase through the second mortgage while keeping the first mortgage at a desired loan-to-value ratio.

This arrangement allows the borrower to effectively use both loans to cover the total cost of the home, thereby facilitating home purchases that may otherwise be financially unfeasible due to PMI costs. In typical situations, a piggyback loan consists of an 80-10-10 structure, where the first mortgage covers 80% of the home’s purchase price, the second mortgage (the piggyback loan) covers 10%, and the borrower puts down the remaining 10%. This approach achieves the goal of minimizing additional insurance costs while also enabling buyers to access more favorable loan conditions.