Mortgage loans usually require a down payment of at least 20 % of the home price. If the borrower cannot pay that amount, then private mortgage insurance is typically needed to complete the home loan.
It is possible for a first-time home buyer to have good credit line history required for a good mortgage rate but will not have the savings necessary for a large down payment nor the resources to pay the private mortgage insurance.
For these first-time home buyers, the 80/20 mortgage is an attractive option. The 80/20 mortgage, often called piggyback loans or 100 % financing, allows the borrower to purchase a home devoid of having to submit a down payment or pay private mortgage insurance by taking out two loans i.e., one for 80 % of the purchase price and one for the remaining 20 %, totaling 100 % of the purchase price. The second 20 % mortgage backs up the first mortgage, thus eliminating the need for private mortgage insurance.
The 80/20 mortgage loans are also targeted to those people who are renters or renting apartments. These types of people can afford monthly rents, the costs of which are roughly about the same as the cost of a home. Since their rent costs are a cycle, at the end of their monthly bills, these people do not have sufficient funds saved to be able to afford a down payment.
These people may be able to borrow money on loan programs where little or no down payment is required. But to do so, they would have to provide a private mortgage insurance or PMI. If you want to avoid PMI, you can take an 80 20 mortgage loan.
In most cases, the interest rate of the second loan of an 80/20 mortgage loan is higher that first. However, if you combine the two payments in an 80/20 mortgage loan, you get lower costs.
By comparing the cost of an 80/20 mortgage loan with the cost of a regular loan with PMI, you can see evidence of this loan. The 80/20 mortgage loan usually costs less each month.
In several ways, the 80/20 mortgage loans are structured by lenders. Some lending companies structure their 80/20 mortgage loan with the first loan having a 5/1 ARM payment. This means that for the first five years, the 80/20 mortgage loan has a fixed rate. However, the payment for the 80/20 mortgage loan interest rates is adjusted annually after the initial five years.
Others structure their 80/20 mortgage loans in a slight different way. The 80/20 mortgage loans have the 20 percent piggyback dependent on the prime rate. The 80 percent of the 80/20 mortgage loan can be a fixed rate, adjustable, or interest-only.
While an 80/20 mortgage allows the borrower to get 100% home financing, it usually requires the borrower to pay the closing costs. Two separate closings may be required if the borrower gets the two mortgages from different lenders, resulting in higher overall closing costs. In taking out an 80/20 mortgage loan, there is also a gamble involved.
Because the home is financed 100%, if the home ever depreciates in value, the borrower runs the risk of owing more than what the home is worth. Until the loan is paid off, the borrower cannot sell the home or consider home mortgage refinance.
A good place to start shopping for an 80/20 mortgage is a mortgage broker. Mortgage brokers have access to a variety of unconventional mortgage lenders and programs to help get people qualified to purchase their homes. If you use a mortgage broker be sure to shop from a variety of offers and read all of the small print.
You will need to do your homework to avoid overpaying for your mortgage. To learn more about your mortgage options and avoiding common mortgage mistakes that can cost you thousands of dollars, register for a free mortgage guidebook using the links below.
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