Buying A Home
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80/20 Loan....thoughts?
What are all of your thoughts on an 80/20 loan? FHA was first choice, but the house we are looking at is over the maximum limit so FHA is a no go.
Re: 80/20 Loan....thoughts?
Why don't you do a conventional loan with only five percent down? Youwill have PMI.
Not even aware of anyone doing 80/20 loans anymore, and I am in the mortgage industry.
I have an 80/20 from our home purchase in 2005 (well, more like an 80/18--we had a very small down payment). It has its pros and cons. My main problem with it is that the interest rate on the 20 is high--about 7.15% (and I've seen people on these boards with even higher rates, much higher). Maybe it will be better for you given that interest rates are low these days, but it's definitely something to pay attention to. Also, our 20 portion is repayable over 20 years while the rest is payable over 30--I see that as a pro. But the interest rate is so high that it takes a LONG time to see any payoff. We're actually planning on just throwing a ton of money at this loan and paying it off next year because I'm so sick of looking at how much interest I'm paying. I have no idea what 2nd mortgage interest rates look like these days, but do your homework. I wish I'd better understood how much the interest rate affects our payment when I bought.
The other con is that if you need to refinance, this type of loan can be problematic. It also makes things even more difficult if you ever need to do a short sale or a foreclosure. If you were ever in a bad financial position and need loan modifications, you'd have an easier time if you were dealing with one mortgage and one company. We had to move out of state last year and really couldn't even consider a short sale because of the complexity with two mortgages. We ended up renting it out and it's working out, but, again, something to think about.
But again, the pros are that you avoid PMI and that the 20 may be payable over a shorter term. I assume that you'll actually have some downpayment, so it will actually be less than 20% on the second mortgage. Just make sure that the savings on PMI outweigh the likely higher interest you'll pay on the 2nd mortgage. It's quite possible that it will not.
An 80/20 loan is an 80% first mortgage and a 20% second mortgage at a higher rate to avoid PMI and not put anything down. It's not an 80% mortgage and 20% down which is what I think you were talking about in your post.
Op- I don't know that they still do these loans. If you qualify for a USDA or VA loan those would be 0% down. There are some 3% down first time homebuyer conventional mortgages and 5% down conventional mortgages but you will have PMI on those.
We did this also in 2006. I didn't think they were available at the time. We didn't have any PMI, but we were able to pay off the 20 loan within 4 years so we minimized the amount of interest paid on it.
I used did an 80/20 when I purchased my first house (preDH in 2004). Unlike other posters, my 2nd was not crazy high--just half a percentage point higher than my loan (if I remember correct my 80 was at 5.5% and the 20 at 6%). So MUCH cheaper than paying PMI.
We refinanced last year and it was not a problem at all. You have to have the HELOC/second mortgage subordinated...but that was as easy as a phone call for us. We were able to lower the rate significantly and it has been a great investment property for us.
I will say, I am not sure how many lenders are allowing 80/20 these days.
My Valentine Bookends (2~13~13, 2~15~09)
How about an 80/10/10? You then don't have to put as much down and avoid PMI.
Of course your mortgage broker wants you to do an 80/20... its $$$$$$ in their pocket.
While you can deduct your mortgage interest on your tax returns, you will essentially have NO equity in your home. How long are you planning on staying in this property? Do you have any idea what your rates are going to be? Is your first a fixed rate or an ARM? Keep in mind that this might get you in a home now, but if you plan to move or ever need to refinance, you might be bringing the cash to closing anyhow.
We are planning on staying in this home 10+ years. My job is located only 10 minutes away and H's job is a commute either way. We've lived in this city the last 3 years and plan on staying here to raise a family. The 80 is a fixed loan and interest is going to be around 4.0, probably a little less depending on when we lock it in. The 20 is actually going to be a 15 once we put in our DP of 5% and the interest will be ARM at 2.99 the first 3 months, and 5.0 thereafter. We're planning on paying extra each month to knock the piggyback loan out at an earlier time.
Having just put in an offer last night, we're still waiting to get the actual cost on which our mortgage will be based. Will be taking a closer look at financing options once we get the contract in place.
But you wouldn't be putting 20% down, you would have 2 mortgages, one at a crazy interest rate, and no money down as equity.