What Is an 80-10-10 Mortgage?
An 80-10-10 mortgageis a loan where first and second mortgagesare obtained simultaneously. The first mortgagelien is taken with an 80% loan-to-value (LTV) ratio, meaning that it is 80% of the home’s cost; the second mortgagelien has a 10% LTV ratio, and the borrower makesa 10% down payment.
This arrangement can be contrasted with the traditional single mortgage with a down payment amount of 20%.
The 80-10-10 mortgage is a type of piggyback mortgage.
Key Takeaways
- An 80-10-10 mortgage is structured with two mortgages: the first being a fixed-rate loan at 80% of the home’s cost; the second being 10% as a home equity loan; and the remaining 10% as a cash down payment.
- This type of mortgage scheme reduces the down payment of a home without having to pay private mortgage insurance (PMI), helping borrowers obtain a home more easily with the up-front costs.
- However, borrowers will face relatively larger monthly mortgage payments and may see higher payments due on the adjustable loan if interest rates increase.
Understanding an 80-10-10 Mortgage
When a prospective homeowner buys a home with less than the standard 20% down payment, they are required to pay private mortgage insurance (PMI). PMI is insurance that protects the financial institution lending the money against the risk of the borrower defaulting on a loan.An 80-10-10 mortgage is frequently used by borrowers to avoid paying PMI, which would make a homeowner’s monthly payment higher.
In general, 80-10-10 mortgages tend to be popular at times when home prices are accelerating. As homes become less affordable, making a 20% down payment of cash might be difficult for an individual. Piggyback mortgages allow buyers to borrow more money than their down payment might suggest.
The first mortgage of an 80-10-10 mortgage is usually always a fixed-rate mortgage. The second mortgage is usually an adjustable-rate mortgage, such as a home equity loan or home equity line of credit (HELOC).
Benefits of an 80-10-10 Mortgage
The second mortgage functions like a credit card, but with a lower interest rate since the equity in the home will backit. As such, it only incurs interest when you use it. This means that you can pay off the home equity loan or HELOC in full or inpart and eliminate interest payments on those funds. Moreover, once settled, the HELOCremains. This credit line can act as an emergency pool for other expenses, such as home renovations or even education.
An 80-10-10 loan is a good option for people who are trying to buy a home but have not yet sold their existing home. In that scenario, they would use the HELOC to cover a portion of the down payment on the new home. They would pay off the HELOC when the old home sells.
HELOC interest rates are higher than those for conventional mortgages, which will somewhat offset the savings gained by having an 80% mortgage.If youintend to pay off theHELOCwithin a few years, this may not be a problem.
When home prices are rising, your equity will increase along with your home’s value. But in a housing market downturn, you could be left dangerously underwater with a home that’s worth less than you owe.
Example of an 80-10-10 Mortgage
The Doe family wants to purchase a home for $300,000, and they have a down payment of $30,000, which is 10% of the total home’s value. With a conventional 90% mortgage, they will need to pay PMI on top of the monthly mortgage payments. Also, a 90% mortgage will generally carry a higher interest rate.
Instead, the Doe family can take out an 80% mortgage for $240,000, possibly at a lower interest rate, and avoid the need for PMI. At the same time, they would take out a second 10% mortgage of $30,000. Thismost likely would be a HELOC. The down payment will still be 10%, but the family will avoid PMI costs, get a better interest rate, and thus have lower monthly payments.
FAQs
An 80/10/10 piggyback loan is a type of loan that involves getting two mortgages at once: One is for 80 percent of the home's value and the other is for 10 percent. The piggyback strategy lets you avoid private mortgage insurance or having to take out a jumbo loan.
What is an 80-10-10 loan an example of? ›
This arrangement can be contrasted with the traditional single mortgage with a down payment amount of 20%. The 80-10-10 mortgage is a type of piggyback mortgage.
What are the benefits of the 80-10-10 mortgage? ›
Benefits of an 80-10-10 Mortgage
Lower monthly payment: It's possible your monthly mortgage payment will be lower as you're not paying PMI, even if you're paying off a second loan concurrently. Smaller down payment without PMI: Many lenders require you to pay mortgage insurance if you can't make the 20% down payment.
What does 80% mortgage mean? ›
Even if you don't have a 20% down payment, you can avoid the cost of private mortgage insurance (PMI) with an 80-10-10 loan. You take out a primary mortgage for 80% of the purchase price and a second mortgage for another 10%, while making a 10% down payment.
What does 80 loan to value mean? ›
For example, suppose you buy a home that appraises for $100,000. However, the owner is willing to sell it for $90,000. If you make a $10,000 down payment, your loan is for $80,000, which results in an LTV ratio of 80% (i.e., 80,000/100,000).
What is a piggyback mortgage 80 10 10? ›
How does a piggyback mortgage work? In an 80/10/10 mortgage set-up, the first mortgage is for 80 percent of the property's value, and the second piggybacking one is for 10 percent. The remaining 10 represents the 10 percent down payment that you contribute to the home purchase.
What is an example of loan calculation? ›
If you have a 6 percent interest rate and you make monthly payments, you would divide 0.06 by 12 to get 0.005. Multiply that number by your remaining loan balance to find out how much you'll pay in interest that month. If you have a $5,000 loan balance, your first month of interest would be $25.
What is the best mortgage rule? ›
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
What are the features of an 80 10 10 financing loan quizlet? ›
What are the features of an 80-10-10 financing loan? a) The institutional lender provides the traditional 80-percent first mortgage. Then the borrower gets a 10-percent personal property loan and makes a 10-percent cash down payment.
What is the 10 rule for mortgages? ›
The 10/15 rule
If you can manage to pay 10% of your mortgage payment every week (in addition to your usual monthly payment) and apply it to the principal of your loan, you can pay off your 30-year mortgage in just 15 years.
An 80% loan-to-value (LTV) mortgage is any home loan, where you have a 20% deposit to put down on a property and therefore need to borrow the remaining 80% from a mortgage lender.
What is a healthy mortgage amount? ›
The most common rule for housing payments states that you shouldn't spend more than 28% of your gross income on your housing payment, and this should account for every element of your home loan (e.g., principal, interest, taxes, and insurance).
How much mortgage is too high? ›
And according to Reyes, the ideal mortgage size should be no more than three times your annual salary. If you make $60,000 per year, you should think twice before taking out a mortgage that's more than $180,000.
Is 80% loan to value good? ›
In general, anything under 80% is considered to be a good LTV. Over 80% is considered to be a higher LTV, and whilst there are still mortgages available for 80%, 85%, 90% and even 95% LTVs, you'll have a smaller pool to choose from, and you may have to pay more in the long run.
What is an example of a home equity? ›
Home equity is the value of your house minus the amount you owe on your mortgage or home loan. When you first buy a house, your home equity is the same as your down payment. If you buy a house for $250,000 with a down payment of $25,000, you begin with $25,000 in home equity.
What is the loan-to-value ratio with an example? ›
In the case of a gold loan, it is the ratio of the gold loan to the value of gold at current market prices, subject to traditional haircut. For example, when a gold is made available at 75% LTV, it is not exactly 75% of the market value of gold, but it is 75% of the market value of gold adjusted for quality, costs etc.
What is an example of a loan-to-value ratio? ›
If you have 80% LTV, it means that you owe 80% of what your home is worth. For example, if you owed $400,000 on your mortgage, and your home has an appraised value of $500,000, that would give you a loan-to-value ratio of 80%.
What is an example of a combined loan-to-value ratio? ›
The CLTV ratio is determined by adding the balances of all outstanding loans and dividing by the current market value of the property. For example, a property with a first mortgage balance of $300,000, a second mortgage balance of $100,000 and a value of $500,000 has a CLTV ratio of 80%.
Which of the following is an example of a conforming loan? ›
VA, FHA, and USDA loans are conforming loans when they're at or below the program's loan limits (based on FHFA rules) set for a particular housing market. Nonconforming loans don't adhere to those standards. Some exceed the local loan limit.
Which of the following is an example of an amortized loan? ›
An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount. Common amortized loans include auto loans, home loans, and personal loans from a bank for small projects or debt consolidation.
