Throughout 2016, U.S. housing prices grew by about 5 percent, compared to 2015. Market and economic growth, alongside an increase in buyer demand, are contributing factors to the Federal Reserve’s plan to continue interest rate increases over 2017.
Simultaneously, Federal Housing Finance Agency has announced it will increase lending limits for 2017.
The changes in the home financing realm have reopened the door to 80/10/10 loans, which have been a lending fixture for the last decade, but have been scarcely used in the last ten years as the housing market dropped.
What is an 80/10/10 loan?
An 80/10/10 loan, also called a piggyback mortgage, is a low down payment mortgage option for home buyers. A borrower actually receives two loans, simultaneously, which covers 90 percent of a home’s purchase price. A home buyer would only need to put 10 percent down for a down payment as opposed to the more traditional 20 percent.
80/10/10 mortgage lenders structure their loans differently, but typically they are offered at the lowest rate of interest available. As rates vary over time, often piggyback loan’s monthly payments do too.
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The math behind the 80/10/10 loan
- 80 percent: The largest portion of the 80/10/10 loan is the primary mortgage. Typically, the primary mortgage will be a 30-year fixed rate mortgage but can also be a hybrid ARM.
- 10 percent: The first 10 percent is the portion of the purchase that will be covered by a second mortgage, a home equity line of credit (HELOC), or a home equity loan. This portion of the loan may carry a higher interest rate than the 30-year fixed rate mortgage.
- 10 percent: The final 10 percent represent the down payment a borrower is required to contribute.
Why an 80/10/10 mortgage is appealing
Exceeding mortgage loan limits
Will you be borrowing more than your local mortgage loan limits allow? By using an 80/10/10 as a jumbo loan, you can borrow the local mortgage loan limit with the first lien, and then borrow the additional amount required via a second loan.
To avoid paying private mortgage insurance (PMI)
There is a loophole with piggyback loans and PMI. As David Reiss, Professor at Brooklyn Law School explains, “The big advantage of an 80/10/10 loan is that it allows you to buy a home without saving 20 percent for a down payment or paying private mortgage insurance (PMI).”
Typically, if a borrower puts a down payment less than 20 percent of the home price down, they will be required to purchase private mortgage insurance. Because of the unique structure of an 80/10/10, mortgage lenders actually count the second mortgage as part of the 20 percent down, which allows homebuyers to skip private mortgage insurance (PMI).
A working example of 80/10/10 loans
Let’s say you plan to purchase a home that costs $550,000 and you only have 10 percent for the down payment or $55,000. You will need to find financing to cover the remaining $544,500. So, you have a couple of options:
- You can get one loan of 90 percent and pay mortgage insurance.
- Or you can a piggyback loan where the first mortgage equals 80 percent ($435, 600) and a second piggyback mortgage for 10 percent, or ($54,450). In this scenario, you will avoid paying PMI.
Questions to answer before moving forward with a piggyback mortgage
What is the math?
Compare the 80/10/10 mortgage rates to a single loan. Which are you really getting the better deal on?
Professor Reiss notes, “The main disadvantage of the 80/10/10 loan is that the piggyback mortgage will have a higher interest rate than the first mortgage.”
If you only have 10 percent to put down, see if paying PMI will make your loan more expensive, than an 80/10/10 option with higher interest rates.
PMI is based on the size of your loan but can range from .3 – 1.5 percent of your total loan value, which can really add up. In the scenario above, 1.5 percent of $544,500 is $8,167.50.
There are many calculators available to help assess the best options for loans.
How much flexibility do you have?
Will you be able to refinance your second loan or modify the terms if your home value changes? Often the second-lien holder is usually in a subordinate position to the primary mortgage lender; meaning in order to refinance you’d need to pay off your second loan completely.
Are you qualified for a piggyback?
Piggyback mortgages require borrowers to have a steady credit history. In order to qualify for a loan, you’ll likely need a credit score 680 or higher. If you’ve had a rocky credit history, you might consider an FHA loan instead.
Have you researched other down payment programs?
There are other down payment options that may help determine whether an 80/10/10 mortgage is the best for you. For example, are you a veteran? You may be eligible for a home loan with zero down payments through the Veterans Affairs (VA loan).
Each home buyer needs to make their own decision on what type of home financing is the best for them. Everyone has different financial situations and credit scores.
Mortgages aren’t a one size fits all deal. When deciding if an 80/10/10 loan is good for you, you’ll need to assess your own budget, financial discipline, and the overall risk of your decision. But, for many borrowers, a piggyback loan is the right choice.
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