3 Benefits of 80/20 Loans

80/20 loans is an alternative way to purchase a home for those who may not have money for a down payment. There are a few benefits to using 80/20 loans. This process combines two loans, an 80% loan as the first mortgage and a 20% loan as the second mortgage, to secure a total 100% loan for new homebuyers with little or no money down. It will have two payments with two interest rates; both separate from one another and may even come from two different loan companies.

The Benefits

  1. 100% financing - When you can’t qualify for 100% financing, 80/20 loans may be the right choice for you, especially if you have little or no money for a down payment. The 80/20 loan combines to give you the 100% you need. With this loan option you are required to pay closing costs with the loan, but the seller can help you with a credit.
  1. No PMI - Private Mortgage Insurance (PMI) protects the lender if you happen to default on your loan, and it is a requirement when purchasing a home when you put down 20% or less. However, if you split the mortgage using an 80/20 loan, it is not a necessity to buy PMI on your 80% loan, which will then save you the added money you would have put into that extra insurance payment every month. PMI can be expensive, the cost of the insurance can range between .40 to 2.25 percent of the loan amount. More often than not, when a loan is split up into two loans, the monthly payment is lower than if the loan has PMI.
  1. Lower rate for first mortgage - When you take advantage of an 80/20 loan, your interest rate on the first mortgage may be lower than had you obtained a full 100% loan. The rate on the second mortgage may be higher, but as it is a smaller amount, you will pay off the second mortgage faster and its higher interest rate will no longer be applicable. Typically, your interest rate will be 0.5% to 2.5% lower with 80/20 loans, than they are with a 100% loan.

      You may be given the option of a fixed second mortgage or you may choose a line of credit. There are two different kinds of mortgages:

  • Fixed—if you decide on the fixed second mortgage, the interest rate will not change during the length of the loan. Typically, these loans are due in 15 years and are called  30 due in 15 loans. What this means is that it will amortize over a 30-year period, but you will need to pay it off in 15 years. This has also been known as a balloon payment, however, according to most statistics, most homeowners refinance their homes or sell within seven to nine years.
  • Line of credit—should you choose the line of credit option for your second mortgage, your interest rate will change periodically. Your rates will fluctuate, up or down, depending on the Federal Reserve and market conditions. The benefit of a line of credit is that the rate is typically lower than the fixed rate, sometimes by 2% to 5%.

Be certain to compare all of your available options with your loan officer or loan broker to see which option best fits your needs.  Remember that before you agree to any loan terms, you should see everything in writing and have a full understanding of the program. Take into account all worst case scenarios and make sure you are comfortable with the payments.