80/20 Mortgages

The 80/20 mortgage, or "piggyback loan", is a combination of two mortgages, a standard first mortgage and a second home equity mortgage. This combination of loans allows the buyer to finance up to 100% of the cost of the house. This is particular useful for those with good credit. These mortgages have been designed to assist young first time buyers with the funds to purchase a home. They are usually a working couple with good jobs, but no financial resources for a down payment.

The individuals who use this type of mortgage arrangement includes:

•   Those with limited assets
•   Those who do not want to liquidate what savings they may have accumulated
•   Those trying to avoid rent, and have been unable to save for a down payment
•   Those who have a strong credit profile
•   Those who have access to non-traditional sources of funds, such as gifts, grants, or loans from relatives

There are several varieties of the "piggyback loans" so if you are considering financing your home this way you definitely need to shop around. Get several quotes and recommendations from lenders and select the one you are comfortable with. For example there is a 80-15-5 loan which simply means a first mortgage of 80%, a second equity loan to cover 15% and a down payment of 5%.

There are several loan programs which allow you to finance 100% of your purchase price, but they usually require private mortgage insurance (PMI). Remember that the PMI is to protect the lender in case you default on your loan. It does nothing for you but you have to pay the bill. The "piggyback loan" arrangement allows you eliminate this monthly charge. Generally the cost of the "piggyback loans" is less than the cost of the the first mortgage when the PMI is added on.

The pros of this type of loan is that you can get into a home with almost no money down. You still have to pay closing costs. The 80-20 loan is not just for the cash-strapped borrower. Some home owners have plenty of money for a down payment but they to leave it invested. It's also a cheap way of borrowing money with low interest rate.

The major drawback is that when a home declines in value you may not have enough equity to payoff both loans if you decide to sell. However, this same drawback would occur no matter what type of 100% financed loan you may opt for.

This is just another way of doing some creative financing. Make sure you read the fine print. You should also have your attorney go over the details with you.