Risks of a Piggyback Mortgage Loan

A piggyback mortgage loan allows a borrower to eliminate the need for private mortgage insurance (PMI) due to an insufficient down payment that is below the required 20 percent of a home's value. The loan is a second mortgage loan that is typically equally to 10 percent of the mortgage value, with the borrower required to come up with the remaining 10 percent. In some limited instances, the lender may extend 15 or 20 percent of the loan value with the piggyback loan.

Borrower Must Qualify for Piggyback Loan

A piggyback loan is a good way for certain borrowers to obtain a primary mortgage. A borrower seeking a piggyback loan has to meet the qualifications for the loan, including credit and financial qualifications. Qualifying for the second mortgage loan can sometimes be more difficult than the primary mortgage loan.

Piggyback Loans Have a Higher Rate

A piggyback mortgage loan has a much higher rate than a traditional mortgage loan. This is because of the risk of default due to the act that the homeowner's equity stake in the home is much lower than the required 20 percent. It is easier for a homeowner with a low equity to walk away from the loan when facing a financial hardship than one who is more fully vested.