This type of loan is also known as a piggyback loan because the borrower receives two loans at once – an 80 percent primary mortgage and a 10 percent secondary mortgage, with the remaining 10 percent of the cost of the property being covered by the borrower.
The 80-10-10 mortgage can be an attractive option for prospective homeowners who cannot afford to make a large down payment upfront. While avoiding the need for a large up-front payment might sound appealing, there are also several drawbacks to this type of loan.
The primary benefit of taking out an 80-10-10 mortgage is that it enables the borrower to avoid paying private mortgage insurance (PMI). PMI is typically required when making a down payment of less than 20 percent, and is intended to protect the lender against default in the event that the borrower does not make their payments. Since the borrower is putting down 10 percent of the cost of the property upfront, they don’t need to pay for PMI.
There are also drawbacks to taking out an 80-10-10 mortgage. Interest rates on these loans are typically higher than those of traditional home loans. Additionally, the borrower must qualify for both mortgages, which can be difficult if their credit score is too low. Finally, some lenders may require the borrowers to pay points on the 80 percent portion of the loan in order to secure the loan.
When considering an 80-10-10 mortgage, prospective homeowners should understand the risks and benefits before entering into such an arrangement. The elimination of PMI may seem like a significant benefit, but the higher interest rates on the loan and potential points charged can negate the savings. Additionally, borrowers should consider the possibility that their credit score may not allow them to qualify for two separate mortgages.
In summary, an 80-10-10 mortgage is a type of loan that allows prospective homeowners to purchase a home without needing to make a full 20 percent down payment. The primary benefit of this type of loan is the avoidance of paying PMI, however interest rates on the loan are typically higher and borrowers may need to pay points to secure the loan. It is important for prospective homeowners to thoroughly consider the risks and benefits of this loan before entering into such an agreement.
This article was contributed on Sep 21, 2023
