What is an 80-10-10 mortgage
An 80-10-10 mortgage is a loan where the first and second mortgages occur simultaneously. The first mortgage lien has an 80% loan-to-value ratio (LTV ratio), the second mortgage lien has a 10% loan-to-value ratio and the borrower will make a down payment of 10%.
The 8-10-10 mortgage is also known as the stacked mortgage.
FAILURE 80-10-10 Mortgage
80-10-10 mortgages are frequently used by borrowers to avoid paying private mortgage insurance (PMI). PMI is insurance that protects the financial institution against the risk of borrower defaulting on a loan.
In general, 80-10-10 mortgages tend to be popular at a time when house prices are accelerating. As homes become less affordable, stacked mortgages allow buyers to borrow more money than their down payment would suggest. This annual insurance can cost between 0.25% and 2% of the total loan capital. In the United States, six main companies sell PMI.
Example of mortgage 80-10-10
The Doe family wants to buy a house for $ 300,000 and they have a down payment of $ 30,000 or 10% or the full value of the house. With a conventional 90% mortgage, they will have to buy and pay PMI in addition to the monthly mortgage payments. In addition, a 90% mortgage will generally have a higher interest rate.
Instead, the Doe family can take out an 80% mortgage for $ 240,000, possibly at a lower interest rate, and avoid needing a PMI. At the same time, they would take out a second 10% mortgage of $ 30,000. This type of loan usually takes the form of a home equity line of credit (HELOC). The down payment will still be 10%, but the family will avoid PMI costs and benefit from a better interest rate.
Other advantages of an 80-10-10 mortgage
The second HELOC mortgage works like a credit card, but with a lower interest rate since the equity of the house will support it. As such, it only arouses interest when you use it. This means that you can repay the HELOC, in whole or in part, and eliminate the interest payments on these funds. In addition, once settled, the HELOC credit line remains. These funds can serve as an emergency reserve for other expenses, such as home renovations or even education.
80-10-10 loans are a good option for people who are trying to buy a home but have not yet sold their existing home. In this scenario, they would use HELOC to cover part of the down payment on the new house. They would pay the HELOC when the old house sold.
HELOC interest rates are higher than conventional mortgages, which will somewhat offset the savings from an 80% mortgage. If you intend to repay HELOC in a few years, this may not be a problem.
As house prices rise, your equity will increase with the value of your home. But in a downturn in the real estate market, you could be left dangerously underwater, with a house that is worth less than what you owe.