What is an 80-10-10 Mortgage?

An 80-10-10 mortgage is a creative way to finance your home purchase without paying PMI. Here’s how it breaks down:
– 80% First Mortgage: The primary loan covers 80% of the home’s purchase price. This is typically a conventional loan.
– 10% Second Mortgage: A second mortgage, often in the form of a home equity loan or home equity line of credit (HELOC), covers an additional 10% of the home’s price.
– 10% Down Payment: The buyer pays the remaining 10% as a down payment.
This arrangement is also known as a piggyback loan or combination loan because it involves taking out two separate mortgages simultaneously.

How Do 80-10-10 Mortgages Work?

The process of securing an 80-10-10 mortgage involves several steps:
– First Mortgage: You take out a conventional loan that covers 80% of the home’s purchase price. This loan is usually structured like any other primary mortgage.
– Second Mortgage: At the same time, you secure a second mortgage that covers another 10% of the home’s value. This could be either a fixed-rate home equity loan or a HELOC with variable interest rates.
– Down Payment: You contribute the final 10% as your down payment.
For example, if you’re purchasing a $500,000 home:
– The first mortgage would be $400,000 (80%).
– The second mortgage would be $50,000 (10%).
– Your down payment would be $50,000 (10%).

Benefits of an 80-10-10 Mortgage

One of the primary advantages of an 80-10-10 mortgage is that it helps you avoid paying private mortgage insurance (PMI). PMI is typically required when your down payment is less than 20%, but with this structure, you effectively meet that threshold.
Another benefit is the ability to avoid jumbo loans by keeping your primary loan below conforming loan limits. This can make your loan more manageable and potentially lower your interest rates.
Additionally, the second mortgage can provide flexibility in bridging financial gaps. For instance, if you’re waiting for another home to sell or have lower cash reserves, this setup can help fill those gaps.

Qualifying for an 80-10-10 Mortgage

To qualify for an 80-10-10 mortgage, you’ll need to meet certain criteria:
– Credit Score: Lenders typically require a credit score of 700 or higher to approve both loans.
– Debt-to-Income Ratio: Your debt-to-income ratio should be below 36% or 43%, depending on the lender’s guidelines.
– Dual Loan Approval: Since you’re taking out two separate loans, each will have its own approval process and guidelines.

Drawbacks and Considerations

While an 80-10-10 mortgage offers several benefits, there are also some drawbacks to consider:
– Higher Interest Rates: The second mortgage often comes with higher interest rates and may have adjustable rates over time.
– Complex Refinancing: Refinancing with two mortgages can be more complex than refinancing a single loan.
– Higher Closing Costs: Since you’re taking out two loans simultaneously, you’ll face higher closing costs compared to a single mortgage.

Example Scenario

Let’s consider an example to make this clearer:
If you’re buying a $500,000 home using an 80-10-10 mortgage:
– Your first mortgage would be $400,000 at 4% interest.
– Your second mortgage would be $50,000 at 5% interest.
– Your down payment would be $50,000.
This setup allows you to avoid PMI while spreading out your financing across two loans.