What is an 80-10-10 Mortgage?
An 80-10-10 mortgage is a type of financing that allows homebuyers to purchase a property with a down payment of only 10% while avoiding private mortgage insurance (PMI). This type of mortgage is structured as two loans: one for 80% of the purchase price, another for 10%, and the remaining 10% is covered by the down payment.
How does an 80-10-10 Mortgage work?
Here’s an example to illustrate how an 80-10-10 mortgage works:
Let’s say you want to buy a house that costs $300,000. With an 80-10-10 mortgage, you would make a down payment of $30,000 (10% of the purchase price) and take out a first mortgage for $240,000 (80% of the purchase price) and a second mortgage for $30,000 (10% of the purchase price).
The first mortgage would have a lower interest rate and a longer term, typically 30 years. The second mortgage, which is the piggyback loan, would have a higher interest rate and a shorter term, usually 15 years.
By using an 80-10-10 mortgage, you can avoid paying PMI, which is required for conventional loans with a down payment of less than 20%. PMI can add a significant amount to your monthly mortgage payment, so avoiding it can save you money in the long run.
Benefits of an 80-10-10 Mortgage:
1. Avoid paying private mortgage insurance (PMI).
2. Lower monthly mortgage payments compared to a single loan with PMI.
3. Ability to purchase a home with a smaller down payment.
4. Potential tax benefits, as mortgage interest may be tax-deductible.
Overall, an 80-10-10 mortgage can be a smart financing option for homebuyers who want to avoid PMI and have a smaller down payment. It allows you to spread the cost of your home purchase over two loans, potentially saving you money in the long term.
Advantages of an 80-10-10 Mortgage
An 80-10-10 mortgage offers several advantages for homebuyers. Here are some key benefits:
| 1. Lower Down Payment: | With an 80-10-10 mortgage, you only need to make a down payment of 10% of the purchase price, instead of the traditional 20%. This can significantly reduce the amount of cash you need upfront. |
| 2. Avoiding Private Mortgage Insurance (PMI): | By splitting your mortgage into two loans, you can avoid paying PMI. PMI is typically required for borrowers who make a down payment of less than 20%. By having an 80% first mortgage and a 10% second mortgage, you can avoid this additional cost. |
| 3. Lower Interest Rates: | The first mortgage, which covers 80% of the purchase price, typically comes with a lower interest rate compared to a jumbo loan or other high loan-to-value mortgages. This can result in significant savings over the life of the loan. |
| 4. Tax Benefits: | With an 80-10-10 mortgage, you may be able to deduct the interest paid on both the first and second mortgages, subject to certain limitations. This can provide additional tax benefits for homeowners. |
| 5. Flexibility: | An 80-10-10 mortgage offers flexibility in terms of financing options. It allows you to structure your loan in a way that best suits your financial situation and goals. |
Overall, an 80-10-10 mortgage can help you save money, avoid PMI, and provide more flexibility in your home financing. It is important to carefully consider your financial situation and consult with a mortgage professional to determine if this type of mortgage is right for you.
Illustrations of an 80-10-10 Mortgage
Let’s take a closer look at some illustrations to better understand how an 80-10-10 mortgage works:
Illustration 1:
John wants to buy a house worth $500,000 but only has a 10% down payment of $50,000. With an 80-10-10 mortgage, he can secure a first mortgage for 80% of the home’s value, which is $400,000. He then takes out a second mortgage for 10% of the home’s value, which is $50,000. The remaining 10% is covered by his down payment. This structure allows John to avoid paying private mortgage insurance (PMI) and qualify for more favorable interest rates.
Illustration 2:
Sarah is purchasing a property worth $600,000 and has a down payment of $60,000, which is 10% of the home’s value. With an 80-10-10 mortgage, she can obtain a first mortgage for 80% of the home’s value, which is $480,000. She takes out a second mortgage for 10% of the home’s value, which is $60,000. Sarah’s down payment covers the remaining 10%. By utilizing this mortgage structure, Sarah can avoid PMI and potentially secure a lower interest rate.
Illustration 3:
Michael is interested in buying a house worth $700,000 but only has a 10% down payment of $70,000. With an 80-10-10 mortgage, he can secure a first mortgage for 80% of the home’s value, which is $560,000. He takes out a second mortgage for 10% of the home’s value, which is $70,000. The remaining 10% is covered by his down payment. This mortgage structure enables Michael to avoid PMI and potentially save money on interest payments over the life of the loan.
These illustrations demonstrate how an 80-10-10 mortgage can be beneficial for homebuyers who have a smaller down payment but still want to avoid PMI and secure favorable interest rates. By splitting the loan into two parts, borrowers can potentially save thousands of dollars over the life of the loan.
How to Qualify for an 80-10-10 Mortgage
Qualifying for an 80-10-10 mortgage requires meeting certain criteria set by lenders. Here are the key factors that lenders consider when evaluating your eligibility:
1. Credit Score
Your credit score plays a crucial role in determining whether you qualify for an 80-10-10 mortgage. Lenders typically require a minimum credit score of 680 or higher. A higher credit score demonstrates your ability to manage debt responsibly and increases your chances of approval.
2. Debt-to-Income Ratio
Lenders also assess your debt-to-income ratio (DTI), which compares your monthly debt payments to your gross monthly income. To qualify for an 80-10-10 mortgage, your DTI should generally be below 43%. This shows that you have sufficient income to cover your monthly mortgage payments along with your other debts.
3. Employment and Income Stability
Lenders prefer borrowers who have a stable employment history and a consistent source of income. They typically look for a minimum of two years of steady employment and income from the same employer or industry. This stability assures lenders that you have the financial capacity to make your mortgage payments.
4. Down Payment
An 80-10-10 mortgage requires a down payment of at least 10% of the home’s purchase price. Lenders want to see that you have enough savings to cover this down payment, as it demonstrates your commitment to the investment and reduces the risk for the lender.
5. Mortgage Insurance
Since the 80-10-10 mortgage involves two loans, the lender providing the second mortgage may require you to pay for private mortgage insurance (PMI). PMI protects the lender in case you default on the loan. The cost of PMI varies depending on factors such as your credit score and the loan-to-value ratio.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.