- An 80/20 is a type of piggyback loan used to buy a home without using cash for a down payment.
- You’ll get the financing in two parts — the first will be a traditional mortgage for 80% of your purchase price.
- The second portion will be a home equity loan or HELOC, and you’ll use it to make a 20% down payment.
- Read more stories from Personal Finance Insider.
Saving for a down payment on a home is a huge financial undertaking — one that often takes years. What do you do if you feel ready to buy a home, but you don’t have money saved for a down payment? Taking out an 80/20 loan could be your solution.
What is an 80/20 loan?
An 80/20 loan is a type of piggyback loan, which is a home loan that’s split into two parts.
It’s called an 80/20 loan because the first part is a mortgage that covers 80% of the home purchase price. The second part is either a home equity loan or a home equity line of credit that covers the remaining 20%.
With an 80/20 loan, you don’t have any cash set aside for a down payment — which is what sets it apart from other types of piggyback loans. For example, with an 80-10-10 loan, the first mortgage is for 80%, the second one is for 10%, and you have 10% of the purchase price in cash for a down payment already.
Not only does an 80/20 loan allow you to buy a home without a down payment, it also helps you avoid paying for private mortgage insurance, which is required if you have less than 20% down. Having a large down payment is also a useful way to get out of applying for a jumbo mortgage, a type of home loan for a large amount that charges higher interest rates.
Example of an 80/20 loan
Let’s compare a traditional mortgage with an 80/20 loan. In this example, you’re buying a $400,000 home, but you don’t have any money for a down payment. You can either wait and save 3% for a down payment with a traditional mortgage — which is the minimum for a conventional mortgage — or take out an 80/20 loan now with no down payment.
With the 80/20 loan, you’re combining a 30-year mortgage with a 15-year home equity loan.
|Traditional mortgage||80/20 loan|
|First mortgage amount||$388,000||$320,000|
|First mortgage interest rate||3.5%||3.5%|
|Second mortgage amount||N/A||$80,000|
|Second mortgage interest rate||N/A||6%|
Here are the details of your monthly payments with each option, assuming that the private mortgage insurance payment is 1% of your original mortgage amount each year.
|Traditional mortgage||80/20 loan|
|First mortgage payment||$1,742.29||$1,436.94|
|Second mortgage payment||N/A||$675|
|Private mortgage insurance||$323||N/A|
|Total monthly payment||$2,065.29||$2,111.94|
In this example, the 80/20 loan would cost a little extra each month, so you may opt for the traditional mortgage instead. The difference in monthly payments isn’t drastic, though, so you could still decide that it’s worth it to buy now instead of taking time to save for a down payment.
Keep in mind, these would only be your monthly payments for a traditional mortgage until you’ve gained enough equity in your home to no longer have to pay for PMI. For the 80/20 loan, these would only be the payments until the 15-year home equity loan ends, leaving you with only the remaining mortgage payments.
Pros and cons of an 80/20 loan
Because an 80/20 loan splits your financing up into two parts, you can avoid a jumbo mortgage that would charge a higher interest rate. You may also be able to sidestep paying for private mortgage insurance each month.
“Even though you have rates that are in the nines or tens on that second mortgage, it still represents a lower monthly payment and a better use of your income, versus paying insurance premiums that don’t do anything for you,” says Darrin Q. English, senior community development loan officer at Quontic Bank.
An 80/20 loan has extra expenses, though, including two mortgage payments and two sets of closing costs. It’s also likely that your second loan’s interest rate will increase later since the rate will be adjustable.
“It’s unpredictable where rates will go, how the Federal Reserve will increase rates, and what that will do to an adjustable-rate mortgage in the months to come,” English says.
Alternatives to an 80/20 loan
Of course, not everyone can get an 80/20 loan. To qualify, English says you’ll likely need at least a 720 credit score and a debt-to-income ratio of 43% or less. If you aren’t eligible — or if you just don’t want to make two payments every month — you may want to consider other options.
Save for a down payment
Although placing 20% down eliminates the need for PMI, you don’t need a 20% down payment to qualify for a mortgage. Many conventional mortgages only require 3% down, and you can get an FHA mortgage with 3.5% down.
Search for down payment assistance programs
You might be eligible for a program that gives you a loan or grant to make a down payment. Sometimes you’ll get assistance directly through your lender. For example, Chase offers grants of up to $5,500 to lower-income borrowers, and Bank of America has a variety of options depending on where you live. There may also be down payment assistance programs through your state or local government.
Pay for private mortgage insurance
You may simply decide to pay for PMI rather than take out an 80/20 loan, especially if PMI would be less expensive than an 80/20 loan in your case.
Get a bridge loan
Sometimes piggyback loans are useful if you’re moving into a new house but your first one hasn’t sold yet. An 80/20 loan can help you afford a new home until your first house sells.
In this case, you might also consider a bridge loan. This is a home loan that helps you bridge the gap between when you buy your new home and when the finances from selling your original house come in. You can usually borrow up to 80% of your original home’s value, and the term is six months to one year. Bridge loans can be nice because their terms are shorter than a home equity loan or HELOC.
Your decision about whether or not to get an 80/20 loan could depend on how much PMI would cost, or whether you qualify for a down payment assistance program or bridge loan.
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