80/20 mortgages are also called zero down loans and/or no money down loans. These types of loans are increasingly popular throughout the nation. An 80/20 loan is actually 2 mortgage loans, a 1st mortgage (at 80% of the value of the home) and a 2nd mortgage (at 20% of the value of the home.) Theses loans eliminate the need to pay Private Mortgage Insurance (also known as PMI) and also generally provide considerably lower rates than other types of 100% financing. This type of financing helps to keep your payments low and gives you the freedom of not having to put any money down.
Example of how this works:
You want to buy a $300,000 home on a 30 year mtg with 80/20 option
240,000 1st mtg: 6.25% rate = $1477.72 Principal & interest payment
60,000 2nd mtg: 7.75% rate = $ 429.85 Principal & interest payment
An alternative to 80/20 mortgage is a 100% loan. To avoid paying for the Private Mortgage Insurance (PMI), look for a lender that offers LPMI (Lender paid PMI). This type of loans is comparable to an 80/20 loan. The advantage is that the borrower pays for only one mortgage. The disadvantage is that the interest rate is always higher than the loans with PMI. Consult with your licensed mortgage professional to find out more about the 100% loan with LPMI.
An 80/20 mortgage is also a good option to consider for those who plan to put either 5% or 10% down. If you compare the difference in the payment of doing an 80/20 loan as opposed to putting down 5% the difference in payment is not much and some borrowers will prefer to keep the 5% as reserves for an emergency.
This mortgage program is designed to allow customers not to put money down on the purchase price. This is where the term zero down comes from, you however need to be aware that there are closing costs associated with the purchase of your home. An easy way of utilizing the 80/20 loan program to its fullest would be to have the sellers pay closing costs. This will get you the entire purchase price and closing costs without having to pay money at the closing.
An 80/20 can also be accomplished by way of a seller carry back for 20% of the purchase price. This helps borrowers who otherwise might not be able to qualify for the 20% of the purchase price normally finance with a traditional loan, by a traditional bank.
The 80/20 mortgage is one of many creative ways to structure home financing with two loans. Using two loans simultaneously to finance a property is better known as Piggyback.
There are several variations of the 80/20 mortgage available. Among them are the 80/15/5 and the 80/10/10. These are used by home buyers with 5% to 10% to put towards the down payment. Many homebuyers needing large loans also use Piggyback loans to keep the mortgage amount below the Fannie Mae Conforming loan limit, even though they have enough funds to meet the 20% down payment threshold. For instance, one may split an 80% mortgage into a 75% first mortgage and a 5% second mortgage to avoid a higher Jumbo mortgage interest rate.
If you would like to see if the 80/20 Mortgage is right for you call me, Home Jones, at 415-617-5448 or email me at [email protected] and I will be happy to assist you.
80/20 mortgages allow you to purchase with no down payment. As you build equity in your home, you can refinance the 20% second mortgage to get cash out. Or once the balance on your two mortgages is equal to 80% or less of the value of your home, you can refinance and pay off both with 1 single mortgage, usually at a significantly better rate.