A mortgaging technique used by homeowners to reduce their loan-to-value ratio and avoid the need for private mortgage insurance (PMI). Piggybacking consists of a homeowner either taking on a second mortgage as the original one is refinanced, or taking out two mortgages together. By splitting the total mortgage amount into two loans, the borrower can decrease the ratio of the amount of the mortgage to the value of the home to under 80%, the ratio floor that necessitates PMI. The downside of this method is that the second mortgage typically comes with a higher interest rate than the first mortgage. Piggybacking can also be used on certain types of loans.
Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University