Applying for an 80 20 Loan: Way to Reduce Private Mortgage Insurance Costs

80 20 loans are not nearly as complicated as they sound.The first of the two is a loan extended for 80% of the value of the home’s sale price. The 20 part of the term 80 20 refers to the second half of this option: a loan for 20% of the home’s sale price.

As of late, the current economic climate have rendered 80 20 loans a nonexistent option to most people seeking a loan. During the explosion period of the real estate market, the 80 20 loan was very common and many people utilized this option.

Why to Take 80 20 Loans?

There is solid reasoning behind this two-pronged loan. It is more costly to obtain financing for more than 80% of one’s financing. Part of the reason is a loan of that amount requires private mortgage insurance. When one opts for an 80 20 loan, he is no longer required to procure private mortgage insurance. Thus, an 80/20 loan spares the borrower that expense. It’s a money-saving option. The second half of the 80 20 loan is a loan extended as a home equity line. This is also called a second mortgage.

How Does an 80 20 Loan Work?

These are loans deemed “incomplete,” which negates the need for a down payment. One is not required to put any money down in order to get the loan. The fee to the consumer is the closing costs. These must be paid in order to finalize the loans. Of the two loans, the 80 half of the equation typically comes at a lower interest rate than the 20% loan. But that’s offset by the fact that the borrower can typically discharge the loan more easily as long as he administer his income responsibly. This allows one to grow the equity in his/ her home rapidly.

The downside of the 20% loan is that the interest rate is higher than what one can expect on the 80% loan. The piggyback loan, which is how the 20% loan is often referred, sometimes proves challenging for the consumer to make payments since the repayment period is shorter. The upside of the 80 20 loan is that the total payment of both loans is typically less than a loan for more than 80% of the home’s value would’ve been, especially when factoring in mortgage insurance.

 

Risks Associated With an 80 20 Loan

Be aware that often since the 80 20 is really two loans, two sets of closing costs must be paid. This is due to the fact that the funding for each loan comes from an independent lender. If the borrower is using a broker for financing, this is doubly true. If one’s house decreases in value, he is locked into the loan. In that situation, the borrower would be unable to put his home on the market and move. Refinancing would also not be an option. The borrower would have to remain in the house and continue making payments until he repaid the entire loan.