How to Refinance 80/20 Loans

Refinancing 80/20 loans can result in lower overall monthly housing costs. Many new loans will include private mortgage insurance, but there may still be a substantial savings to the consumer. It is important to know if your loan is a refinance candidate and to know if the market conditions will put you in a better financial position. Begin with knowing the terms of your loan.

Conditions Favoring a Refinance

When homes are purchased with 80/20 loans, lenders issue a first mortgage covering 80 percent of the home's value and a second mortgage.  Usually, the remaining 20 percent loan is at a higher interest rate than the first mortgage. This loan option allows the borrower to avoid both a down payment and paying for private mortgage insurance.

If interest rates are lower than the rate of your mortgage, it can make sense to refinance all or part of your loan. You can combine the two loans into one mortgage or you refinance the 80 percent or 20 percent portion. When refinancing one loan portion, you may be required to pay mortgage insurance, if the new loan exceeds 80 percent of the value of the home.  Be certain the lower interest rates decrease the payment enough to offset the added insurance cost, always ask for your total monthly payment and do not only rely on the principal and interest reduction.

Know Your Loan-to-Value Ratio 

Your loan to value ratio is the value of your loan amount divided by the value of the home.  The difference is called the equity and is calculated with a percentage.  If the value of your home has reduced, you may have a negative loan-to-value ratio.  A refinance for a high loan to value ratio is not an option because most lenders will not finance your loan. 

Terms and Fees

Be certain there are no prepayment penalties on either loan. Often, the second or 20 percent portion has more restrictive terms and can be expensive to refinance.  A prepayment penalty can can be expensive and your payment should be reduced significantly if you will refinance with a penalty and absorb the cost. 

Choosing a Lender

Don't limit yourself to the bank or mortgage company that originated your loan. If your credit is strong, lenders will compete for your refinance business. So shop for the best terms, fees and rates.

Choosing a Loan

If interests are low, locking in a 30-year, fixed-rate mortgage can offer significant savings. However, if you believe rates will continue to fall, an adjustable rate mortgage offers the opportunity to claim the benefit of lower rates in the future, ARM loans have the added value of lower initial payments. It is vital to know the value of your home, how long you plan to stay there, the terms and fees of your current loan and the expected savings of the refinance.

Look for Hidden Savings

Refinancing 80/20 loans can mean that you have to pay private mortgage insurance. PMI can be a tax deductible, just as your interest payment is, consult with your accountant for more information. Ask each lender to provide you with a good faith estimate to compare each lender's true expenses.