What Are 80/20 Loans?

80/20 loans are two mortgages that are used to purchase a home for zero down payment. The 80 percent loan serves as the standard loan, and the 20 percent loan serves as the loan that covers the downpayment. Lenders also use these loans to help avoid private mortgage insurance because the monthly expense can be high.

Interest Rates on 80/20 loans

The interest rates will not be the same for both loans. It is common for the 20% loan to have a higher rate than the 80% loan. Sometimes lenders will charge a slightly higher than average interest rate on the 80% as a result of the second mortgage. This is because a second loan can increase your debt-to-income ratio, causing you to appear as a higher risk borrower. 

Avoid PMI

PMI, private mortgage insurance, is an additional insurance that borrowers are required to pay by many lenders if their down payment is less than 20%. This coverage protects the lender against default. Typically, a lender requires a monthly mortgage insurance rate of .55 to 2.25 percent of the loan amount.  PMI can be very expensive, many lenders find 80/20 loans help reduce monthly mortgage expenses.