What is an 80-10-10 Loan?
Private mortgage insurance, or PMI, is one expense that most homeowners would rather live without. While you can ask your lender to cancel PMI once you’ve accumulated 20% equity in your home, that could take a while. So, to sidestep PMI, many borrowers have decided to take out an 80-10-10 loan -- effectively taking out two mortgages at once in order to avoid mortgage insurance altogether.
How the 80-10-10 Loan Works
In an 80-10-10 loan, a buyer receives two home loans at the same time. The first loan, a traditional mortgage, covers 80% of the home’s price. The second mortgage, often a home equity loan or HELOC, pays for 10% of the home’s price. The remaining 10% is covered by the borrower’s downpayment.
80-10-10 Loans vs. FHA Loans
For borrowers looking to save money, getting an FHA loan is a popular alternative to 80-10-10 loan. Unlike an 80-10-10 loan, an FHA loan may only require a down payment as low as 3.5%. Despite the fact that FHA loans don’t require PMI, they do require paying a mortgage insurance premium, or MIP, which is usually required for the entire life of the loan. In addition, borrowers are often required to pay a one-time upfront MIP payment of 1.75% of the loan. So, despite the fact that they do require a larger down payment, an 80-10-10 loan can end up being significantly less expensive than an FHA loan.
In most cases, 80-10-10 loans are much more cost effective for people who have great credit. For those with a less-than-stellar credit score, the secondary mortgage, which is often a HELOC, will have a particularly high
80-10-10 Loan Variations
The 80-10-10 isn’t the only kind of dual mortgage or “piggyback” loan available on the market. There are also other options, including an 80-5-15, and an 80-15-5. Just like with the 80-10-10 loan, the first number represents the primary mortgage, the second number is the secondary mortgage, and the third number represents the down payment.
Risks of 80-10-10 Loans
80-10-10 loans can offer several great benefits to a borrower, but they also come with a few risks as well. If you want to refinance your home later on, it may be much more difficult since you’ll often need the approval of both your primary and secondary lender to do so. Plus, if your second mortgage is a HELOC (which it often will be), the interest rates are usually variable, so they could go up during the duration of your loan.
Other Reasons to Get an 80-10-10 Loan
While avoiding PMI is the primary reason that most people look into getting an 80-10-10 loan, it isn’t the only reason. Since they technically are composed of two mortgages, an 80-10-10 loan can help you bypass lending limits for jumbo mortgages, allowing you to buy a more expensive home.