80/20 Loans: What Is The Best ARM Term

80/20 loans have a primary loan amount for 80 percent of the mortgage and a second loan for 20 percent of the mortgage amount. These loans trigger a requirement for primary mortgage insurance (PMI) to protect the interest of the lender in the event that the borrower defaults on the loan.

The Best ARM Term

The best ARM or adjustable-rate mortgage term for an 80/20 loan is one that allows the borrower to renegotiate the terms of the loan once the home’s equity exceeds 20 percent. This eliminates the PMI requirement and provides assurances to the lender that the homeowner is financially responsible. An ARM has with it a risk of going up significantly in cost when interest rates rise but not adjusting lower as rapidly when interest rates fall. The best situation for a borrower is one where they are able to refinance the 80/20 ARM into a fixed rate loan that has a predicable cost to it.