What Is A 80/20 Mortgage

By Cyndee Carmer | March 4, 2009

Zero down loans and 80/20 mortgages are the same thing. These kinds of loans hold a great deal of appeal for many people. They are also sometimes referred to as no money down loans.

This kind loan is two mortgage loans in one. The first mortgage comprises 80 percent of the value of a house while the second mortgage makes up 20 percent of the value. These types of loans require a pristine credit report. In fact with recent mortgage foreclosures 80 /20 mortgages may be near impossible to find.

An 80/20 mortgage does not contain private mortgage insurance (PMI) and most often boasts lower interest rates than does other kinds of financing that are 100 percent. What this means for the consumer is that they do not have to provide a down payment and their monthly payments will be reasonable and low.

Let us look at an example of how this would work in the real world:

You wish to take advantage of a 30 year mortgage by way of an 80/20 home loan. The home in question is $300,000.

1st mortgage- $240,000 at a 6.25 percent rate. This equals $1477.72 (principal and interest payment)

2nd mortgage- $60,000 at a 7.75 percent rate. This equals $429.85 (principal and interest payment)

If an 80/20 mortgage does not appeal to you for whatever reason, then there is an alternative to this- the 100% loan. The 100% loan is similar to an 80/20 loan. In order to avoid paying the PMI seek out a lender who offers what is known as lender paid PMI (or LPMI). The greatest advantage of this loan is that there is only one mortgage to pay for, as opposed to two.

The biggest failing of this kind of loan is that the interest rate will be higher than with a loan that includes PMI. Talk with a qualified mortgage specialist to learn more about the 100% LPMI loan option

An 80/20 home loan can also be such that there is a seller carry back which accounts for 20% of the price of the home. What this does is it provides assistance for those prospective homebuyers who would otherwise not qualify for the 20% through a conventional loan.

This type of program means that no money needs to be put down on the home. Keep in mind however that there are still closing costs to pay for. If you choose to take full advantage of the 80/20 loan option then have the sellers take care of the closing costs for you.

This type of two loan structuring that makes up the 80/20 loan is sometimes referred to as piggyback. The 80/20 home loans have more than one variation. There is the 80/15/5 and the 80/10/10. In these cases the person wishing to buy a home would use five to 10 percent to use as the down payment.

It is common practice for piggyback loans to be used in order to make sure that a mortgage remains below the loan limit set by Fannie Mae. A viable option would be to split up an 80 percent mortgage with a first mortgage of 75 percent and a second mortgage of five percent. This helps to prevent having to pay a higher jumbo mortgage interest rate.

A piggyback loan can also work well for those who decide to put anywhere from five to 10 percent down on their new homes. In other cases, one might decide to use the five percent for an emergency fund.

If you have no money for a down payment then an 80/20 home loan is an option worth considering. In time as you build up equity you can then turn around and refinance the second mortgage of 20 percent in order to get some money out of it.

Another option is to wait until both mortgages equal 80 percent and then refinance. This will make it possible for you to pay off both mortgages with one and get a better interest rate in the process.

If you cannot find a lender to make an 80/20 loan, dont despair, banks and lenders will always have creative ways to make the American dream come true, for individuals and families. Consult your mortgage broker for the latest programs.

Cyndee Cramer frequently writes about mortgages personal finance . To learn more about the mortgage process visit Compare Mortgage Rates for tips on How to get cash out from a refinance mortgage

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