Eighty Twenty Mortgages

Eighty Twenty Mortgages

Although sometimes advertised as mortgages products, 80/20 mortgages and 80/10/10 mortgages are not really mortgage loans. They are a combination of a primary mortgage loan with a second loan typically to make up the difference between the borrower's down payment and a loan covering 80% of the purchase price of a home. Because there is a second loan on top of a first loan, these are also referred to as piggyback loans or piggyback mortgages

Piggyback loans are a strategy most commonly used to for several specific situations:

  • The are used to avoid paying private mortgage insurance or PMI (see the article Avoiding Private Mortgage Insurance). PMI adds an additional monthly expense that many borrowers would rather avoid paying. They must, however, make sure that the costs of the second loan (any closing costs as well as the monthly interest) are not more expensive than paying the PMI.
  • They are used by borrowers to avoid taking out a jumbo mortgage (see the article Avoiding A Jumbo Mortgage). A jumbo or non-conforming mortgage is any mortgage that exceeds Fannie Mae and Freddie Mac's loan limits. Jumbo mortgages typically carry higher interest rates than conforming mortgages. For this reason, over the life of a jumbo loan a borrower can end up paying substantially more interest than if they were to have a conforming mortgage. As with avoiding PMI, a borrower needs to make sure that the costs of the second loan are not more than the interest they would pay on the jumbo mortgage.
  • Combinations loans are also sometimes used to purchase a home with little or no money down. In this case, the second loan acts in place of the borrower making a down payment. Borrowers typically need a pretty strong credit history to use this tactic.

In these type of piggyback loans (80/20, 80/10/10, 80/15/5), the first number typically refers to how much of the purchase price of a home is being covered by the primary or first mortgage, the second number is typically how much of the purchase price is covered by the second mortgage, and the third number is the percentage down payment (The numbers may sometimes be turned around. There are numerous other combinations that can be created using first and second mortgages.).

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