- An 80/20 is a type of piggyback loan used to buy a house without using money for a down payment.
- You will get the financing in two parts – the first will be a traditional mortgage for 80% of your purchase price.
- The second part will be a home equity loan or HELOC, and you’ll use that to make a 20% down payment.
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Saving for a down payment on a house is a huge financial undertaking, often taking years. What do you do if you feel ready to buy a home, but have no money set aside for a down payment? Taking out an 80/20 loan could be your solution.
What is an 80/20 loan?
An 80/20 loan is a type of piggyback loan, that is, a home loan divided into two parts.
This is called an 80/20 loan because the first part is a mortgage that covers 80% of the purchase price of the house. The second part is either a home equity loan or a home equity line of credit that covers the remaining 20%.
With an 80/20 loan, you don’t have money set aside for a down payment, which sets it apart from other types of piggyback loans. For example, with an 80-10-10 loan, the first mortgage is 80%, the second is 10%, and you already have 10% of the purchase price in cash for a down payment.
Not only does an 80/20 loan allow you to buy a home with no down payment, it also saves you the hassle of paying for private mortgage insurance, which is required if you have less than 20% down payment. Having a large down payment is also a useful way to avoid applying for a jumbo mortgage, a type of large mortgage loan that charges higher interest rates.
80/20 loan example
Let’s compare a traditional home loan with an 80/20 loan. In this example, you are buying a house for $ 400,000, but you have no money for a down payment. You can either wait and save 3% for a down payment with a traditional mortgage – which is the minimum for a conventional mortgage – or take out an 80/20 loan now with no down payment.
With the 80/20 loan, you combine a 30-year mortgage with a 15-year home equity loan.
Here are the details of your monthly payments with each option, assuming your private mortgage insurance payment is 1% of your original mortgage amount each year.
In this example, the 80/20 loan would cost a little more each month, so you can go with the traditional mortgage instead. However, the difference between the monthly payments is not drastic, so you can still decide that it is worth buying now instead of taking the time to save for a down payment.
Keep in mind that this would only be your monthly payment for a traditional mortgage until you have acquired enough equity in your home that you do not have to pay for the PMI again. For the 80/20 loan, that would only be the payments until the end of the 15-year home equity loan, leaving you with only the remaining mortgage payments.
Advantages and disadvantages of an 80/20 loan
Because an 80/20 loan divides your financing into two parts, you can avoid a jumbo mortgage that would charge a higher interest rate. You can also avoid paying for private mortgage insurance every month.
“Even if you have rates that are in the nines or tens on that second mortgage, it still represents a lower monthly payment and a better use of your income, compared to paying insurance premiums that do nothing for. you, ”says Darrin Q. English, Senior Community Development Credit Officer at Quontic Bank.
There are additional expenses with an 80/20 loan, however, including two mortgage payments and two sets of closing costs. It is also likely that the interest rate on your second loan will increase later since the rate will be adjustable.
“It is unpredictable where the rates will go, how the
will increase rates, and what that will do for an adjustable rate mortgage in the months to come, ”English said.
Alternatives to the 80/20 loan
Of course, not everyone can get an 80/20 loan. To qualify, English says you’ll likely need at least a credit score of 720 and a debt-to-income ratio of 43% or less. If you’re not eligible, or just don’t want to make two payments per month, you may want to consider other options.
Save for a down payment
While a 20% down payment eliminates the need for PMI, you don’t need a 20% down payment to qualify for a mortgage. Many conventional mortgages only require a 3% down payment, and you can get an FHA mortgage with a down payment of 3.5%.
Find down payment assistance programs
You may be eligible for a program that gives you a loan or grant to make a down payment. Sometimes you will get help directly through your lender. For example, Chase offers grants of up to $ 5,500 to low-income borrowers, and Bank of America offers a variety of options depending on where you live. There may also be down payment assistance programs through your state or local government.
Pay for private mortgage insurance
You can just decide to pay for the PMI rather than taking out an 80/20 loan, especially if the PMI would be cheaper than an 80/20 loan in your case.
Obtain a bridging loan
Sometimes piggyback loans are useful if you move into a new home but your first has not yet sold. An 80/20 loan can help you buy a new home until your first home sells.
In this case, you can also consider a bridging loan. This is a home loan that helps you bridge the gap between when you buy your new home and when the finances of the sale of your original home come in. You can usually borrow up to ‘to 80% of the value of your original home and the term is six months. at one year. Bridge loans can be attractive because they have a shorter term than a home equity loan or HELOC.
Your decision whether or not to get an 80/20 loan may depend on the cost of PMI, or whether you qualify for a down payment assistance program or a bridge loan.