Eighty Twenty Loans and Variations

Home prices are growing at a faster pace than incomes these days. It can be disheartening when you dream about owning your dream home but cant seem to put any money away for a down payment no matter how hard you work. Some of you may be young professionals that have recently graduated from college and have great jobs but obligations to pay debt that has accumulated from the college days. But you found the home you want and you want it now.

You know you can afford the monthly payments; you just dont have the money for the down payment. So what do you do? Well there is always the option of an 80-20 loan. These loans combined finance 100% of the cost of the home. The first loan is for 80% of the homes value. It works like a normal mortgage in that it can be financed for a 30 year fixed rate interest.

The second mortgage, the 20% loan, is a piggyback loan. It may be treated like a line of credit or may be financed as a fixed rate mortgage as well. It depends on the mortgage company and the conditions agreed to at the time of the contract. 20% loans usually have a higher interest rate than the 80% loan. Still, the two loans added together are typically cheaper than the mortgage would be
financed as one mortgage with PMI.

Private Mortgage Insurance is a mandatory, expensive insurance for any home that finances over 80% of the value of the home. The 20% loan waves the 20% down payment that would be required in order to avoid paying the PMI.

There are other variations of the 80-20 loan. There are the 80-15-5 loan and the 80-10-10 loan where 80% loan is the first mortgage, the 15% loan is the piggyback loan with a 5% down payment or 80% is the first mortgage, 10% is the piggyback loan with a 10% down payment.

All three of these variations come to the same conclusion. They all avoid PMI. The only money that the buyer has to come with up front is the closing cost, unless the buyer can get the seller to pay it and then essentially the buyer gets into a home without any money up front.