All About 80/20 Mortgage Loans

Before low down payment mortgage programs became available, most people had not thought about having to pay mortgage insurance or trying to find ways to avoid it by finding out all about 80/20 mortgage loans.

Private mortgage insurance is required in circumstances where a lender makes a loan of more than 80% of the home’s appraised value. Anytime a down payment smaller than 20% is made on a mortgage loan, the lender’s risk of not being able to recover all the expenses of foreclosing the property in case the homeowner defaults on the loan is considered increased. Because the lender is taking on a greater risk, some underwriting guidelines (especially those associated with VA and FHA loans) require that the borrower be charged for private mortgage insurance (PMI), which insures the lender against losses incurred due to a mortgage loan default. Under most circumstances, the home buyer will pay about 1 percent of the loan value at the time of closing and around a half a percentage point for every year private mortgage insurance is applied to the loan. As a result, this can raise the homeowner’s monthly mortgage payments.

Rather than pay for private mortgage insurance, and increase their monthly mortgage payments, many consumers are interested in finding ways to get around it and have discovered the beauty of the 80/20 loan strategy. With an 80/20 loan, the homeowner is able to take out an 80 percent first mortgage and a 20 percent second mortgage. Through this strategy, the homeowner is basically able to obtain 100% mortgage financing for their home purchase.

The second mortgage will usually have a higher interest rate because of the greater risk associated with giving out a second mortgage. Moreover, many lenders require the second mortgage to be an adjustable rate mortgage, whose interest rate fluctuates with a market index and therefore may end up even higher. But, despite the higher cost associated with the second mortgage, under many circumstances, it is still cheaper than paying PMI. Determining whether an eighty-twenty mortgage deal is an option you should consider under your circumstances comes down to crunching out the numbers and figuring out if it is indeed cheaper than paying for a 100% mortgage with private mortgage insurance.

As with other zero down mortgage deals, the major drawback of an 80/20 mortgage loan is the risk of ending up with a mortgage balance that is greater than the property is worth, should the real estate market go down. Under such circumstanced, if you wish to sell the property, you will have to come up with the money to pay for the difference between the sale price and amount still owed on the home loan. However, this won’t likely be a problem if you hold on to the property for a long time because your loan payments will be reducing the balance owed.

Other loan structures such as the 80/10/10 or 80/15/5 are also available. Those are very similar to the 80/20 loan, except for a non-zero down payment component. In the 80/15/5 loan, for example, the buyer will make a 5% down payment and take a second mortgage of 15%.

Most lenders can help consumers find out all about 80/20 mortgage loans. There are a number of flexible options available with 80/20 mortgage loans, including fixed mortgage loan payments and adjustable interest on the main 80% portion of the 80/20 mortgage. Other options allow for the homeowner to payoff the second mortgage loan in a shorter amount of time with a balloon payment at the end. In the end, it is a personal decision whether to go ahead and pay private mortgage insurance or try to avoid it by using an 80/20 mortgage loan.