What is a piggyback loan (80/10/10) and how does it work?

A piggyback loan, commonly structured as 80/10/10, pairs a primary mortgage equal to 80 percent of the home's value with a second loan for 10 percent, letting you put down 10 percent without paying PMI. The numbers describe the split: an 80 percent first mortgage, a 10 percent second loan, and a 10 percent down payment.

By keeping the first mortgage at 80 percent, the buyer stays below the 80 percent loan-to-value threshold that triggers private mortgage insurance, while the second loan covers part of the gap.

The second loan is typically a home equity line of credit or a fixed-rate second mortgage, with its own rate, term, and payment. It sits behind the first mortgage in priority, which means the first lender gets paid first if there is ever a foreclosure. That subordinate position makes second loans riskier for lenders, so their rates are usually higher.

The combined payment of both loans plus your down payment is the true cost of the arrangement. Comparing that total against a single loan with PMI tells you which path is cheaper.

The main appeal of a piggyback loan is avoiding PMI without needing a full 20 percent down payment. In the past, when PMI was not tax-deductible, the interest on both mortgages was deductible, making the structure attractive. Today the comparison depends on current rates and the tax treatment of each.

Buyers also use piggybacks to finance a purchase with a smaller down payment while keeping two loans that each fall under conforming limits, or to buy a second home without the down payment rules of a single large loan.

Piggyback loans add complexity and risk compared to a single loan. The second loan carries a higher rate, and you now have two payments and two lenders to manage. If your finances tighten, you are servicing two debts instead of one, and a default on either can be a problem.

There are also closing costs on both loans. Compare the total cost of a piggyback, including both sets of fees and payments, against a single 90 percent loan with PMI over the years you will keep the home.