What Is an 80/20 Home Loan?
An 80/20 home loan is a combination of two separate mortgages--an 80 percent first mortgage and a 20 percent second mortgage--that is used to purchase or finance a home with no equity or down payment.
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Significance
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An 80/20 mortgage allows a borrower to move into a home with no money out of pocket. This had been the only 100 percent non-government mortgage option for many borrowers, but it has almost ceased to exist because of the mortgage crisis.
Function
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With an 80/20 home loan, a borrower can use funds for closing costs or home improvements, as opposed to a down payment. Additionally, the borrower will have two monthly mortgage payments.
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Types
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Most 80 percent first mortgages are fixed-rate mortgages with a set monthly payment. However, the 20 percent second mortgages are usually variable-rate mortgages with a much higher interest rate. Because of the variable nature of the rate, payments can fluctuate from month to month.
Considerations
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With an 80/20 home loan, a borrower does not have any equity in the home at the time of the purchase of the mortgage. If the borrower sells the home early in the mortgage term, he may or may not have any equity in the property. Furthermore, he could still owe on the mortgage if the house sells for less than the amount of the loan.
Benefits
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An 80/20 home loan allows a borrower to get into a home with minimal cash outlay and allows her to build up her reserves for emergency purposes or to make needed repairs to the residence. It also allows the borrower to avoid private mortgage insurance (PMI).
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References
- Photo Credit Image by Flickr.com, courtesy of woodley wonderworks
