80 10 Loans for Home Buyers Today
An 80 10 10 loan is a mortgage option in which a home buyer receives simultaneously a first and second mortgage, covering 90 per cent of the home’s purchase price. The buyer is only putting down 10 per cent. This type of loan is also known as mortgage piggyback. It is popular because it helps buyers avoid private mortgage insurance while making less than 20 per cent down payment.
Are there 80 10 Ten Loans?
By 2020, most lenders are offering piggyback funding.
Lenders have always offered the first mortgage — the 80 per cent share of the purchase price of the home. In the past, finding a lender for the 10 per cent second mortgage was challenging.
That is not the case any more. Because of the program’s extreme popularity, most lenders have developed their own second hypothetical program or formed partnerships with external companies to secure the home buyer ‘s second hypothetical financing — making it a smooth transaction for buyer.
How are these Loans Working?
An 80 10 10 or “piggyback” loan describes two loans which are opened at the same time, usually to buy a home. One “piggybacks” loan on top of another to cover a larger percentage of the purchase price for the home.
The first mortgage is the purchase price for 80 per cent. A second loan will then be opened at a price value of 10 per cent. The second loan is often referred to as a second mortgage, house equity credit line (HELOC), or house equity loan.
The borrower makes a down payment out of their own funds for the remaining 10 per cent.
In addition to 80/10/10’s, there are other types of piggyback mortgages, such as an 80/5/15 and 80/15/5. The second number describes the second mortgage at all times and the third number describes the down payments.
How do I eliminate PMI from Piggyback Loans?
The first and second mix of mortgages allows the borrower escape private mortgage insurance ( PMI) as the lender considers it to be a down payment of 20 per cent. PMI is required with less than 20 per cent down on most conventional loans.
The PMI loophole exists therein. As part of your down payment, the Lenders “count” the second mortgage. So you have your 20 percent down with 10 percent down cash plus a 10 percent second mortgage, without covering the whole thing out of pocket.
Is an 80 10 10 cheaper than FHA?
The minimum down payment is only 3.5 percent for an FHA mortgage. Purchasers may, however, make a bigger down payment if they wish.
Should a buyer opt for FHA if they want to put down 10 per cent?
The buyer should consider the mortgage insurance premium (MIP) of FHA which is equal to 0.80 percent of the amount of the loan (if a 10 percent down payment is made). For a loan amount of $250,000 this is $167 per month.
The MIP with a 10 per cent down payment is required for the first 11 years of the loan. MIP is payable for the life of the loan, with a smaller down payment.
FHA charges a one-time upfront mortgage insurance premium of 1.75 percent of the loan amount in addition to this monthly mortgage insurance cost. These costs can add up and make FHA considerably cheaper than a piggyback mortgage.
Loans from the Piggyback Vs. PMI Vs. FHA Loans
Which mortgage product comes out on top in a three-way matchup? Let’s look at an example of a $250,000 home buy with 10 percent down.
|$250,000 Home||80/10/10||Conventional 90% (one loan)||FHA|
|First Mortgage Loan Amount||$200,000||$225,000||$228,937 (incl. upfront MIP)|
|Example Interest Rate*||4.75%* (APR 4.95%)||4.75%* (APR 5.07%)||4.25%* (APR 5.53%)|
|First Mortgage Payment||$1,043||$1,173||$1,126|
|2nd Mortgage or Mortgage Insurance Cost||$25,000 second mortgage at 5.24%, (APR 5.593%): $109 (Interest-only|
|PMI: $92||FHA MIP: $152|
The piggyback mortgage saves the buyer $113 a month in this scenario compared to a 90 percent PMI loan and $126 a month compared to FHA.
So, why isn’t everybody doing a Piggyback loan?
In the scenario above, in terms of monthly payments the piggyback mortgage is the clear winner. That loan program may not be for everybody, though. There are a few factors to consider:
- High credit score is often required for piggyback mortgage. You may need to qualify for a 680 score but that will vary with each lender. Borrowers with a less than perfect credit score, an irregular income history, or who use a 10 percent down payment gift will likely need FHA.
- At a later date, piggyback loans could be more difficult to refinance. Must be paid off or subordinated to the second mortgage. In order to subordinate the second mortgage the lender will have to agree to make their loan second behind the new first mortgage in importance. In some cases, it can be difficult to get that agreement.
- Piggyback mortgages don’t have a streamline refinancing option. Expect longer refinancing times than refinancing with an FHA.
- The second mortgage frequently has variable rates. The second mortgage in this case is 1.99 per cent higher than the prime rate (3.25 per cent prime rate was used in this case). When the prime rate were to go up, the second mortgage rate and payment will go up as well.
- The second mortgage is frequently referred to as credit line HELOC, or home equity. HELOC second mortgages often only require interest payable on a monthly basis. And the balance will be the same in five or ten years, if the creditor refuses to make extra principal payments.
- You should be prepared to provide documentation for two separate loans, as the first mortgage of 80% and second mortgage of 10% are often placed with two separate banks, each with their own rules.
And this Winner is …
Each home buyer must decide for themselves which type of loan is best based on factors such as future financial goals, credit score and their desired down payment.
For a lot of lenders the best option is a piggyback loan. And with rules loosening around, more home buyers qualify than ever before.
Only moments away from a pre-approval, you might be purchasing your house.
All purchase price and value scenarios based on $250,000, 10 per cent down payment, 740 credit score, no HOA dues, and WA property. 30 Year fixed rate 1st mortgage with principal and interest payments, 30 Year HELOC 2nd interest-only mortgage, $5000 in first mortgage financing charges and $1000 in second mortgage financing charges. Payments on mortgages rounded to the nearest dollar. Tariffs based on rates available in real time as of 2/21/13.