80-20 Mortgage

An 80-20 mortgage is one in which a potential homeowner obtains two mortgages that essentially finance 100 percent of the price of a home. The primary mortgage finances 80 percent of the purchase price. The second mortgage covers up to 20 percent in cash that is often required as a down payment on a home. Among buyers choosing this type of mortgage, many utilize it as a way to avoid paying private mortgage insurance (PMI) that is required with a down payment of less than 20 percent. This mortgage option has enabled thousands of renters to become homeowners. In many cases, the 80 percent and 20 percent mortgages are not issued by the same lending agency. The piggyback loan often has a higher interest rate, as the lender granting the loan assumes a greater degree of risk. As a result of the 2008-2009 recession and subsequent financing restrictions, these mortgages, also known as piggyback mortgages, are rarely available. To qualify, you must begin with an excellent credit rating. You must also be able to pay the closing costs for the two mortgages.

When considering an 80-20 mortgage, you should analyze whether you will be paying more in combined interest rates than in PMI premiums. Especially if you itemize on your federal income tax return, you may ultimately save more money with a conventional 80 percent mortgage. Also, consider the type of primary mortgage your lender offers: if your only option is an adjustable rate mortgage (ARM), you may be paying significantly more in interest when your rate adjusts a few years after your purchase.

You should also consider the vulnerability of your local real estate market to price fluctuations. If your home loses value after you purchase it, you may end up having to pay more than what your home is worth. In this case, you will have to pay off the loan in full if you need to sell or refinance your residence.