The 80/10/10 Option: Can You Save Money with a Piggy Back Loan?
The biggest hurdle home buyers and home sellers face is not finding the right house to buy, or even setting the right price for the house you are selling. In most cases, it isn’t even the best credit score. It is the down payment. Lenders focus on 20% as the perfect mortgage down payment and that is often the real hurdle. Not hitting that magic number is not a deal breaker of course. The piggy back loan, often referred to as the 80/10/10 option, has become an important way to finance your mortgage without the 20% down payment and might actually save you money.
What is a Piggy Back Loan?
While the housing crisis is approaching a decade anniversary, and the memory still stings more people than it should, the world of home buying and selling has moved the whole incident into the rear view mirror. Even more importantly, so have lenders. There are still numerous ways to still get a low down payment mortgage, many of which come with a cost.
These low down payment loans often come with a cost. For conventional loans, lenders will add a private mortgage insurance, or PMI. For FHA loans, mortgage insurance protection, or MIP is added. Both of these “insurances” are designed to protect the lender from the potential of default. But there might be a better way.
One of the more creative options is the piggy back loan. Often referred to as the 80/10/10, this loan options involves a first mortgage, a second mortgage to cover half of the down payment, and a down payment of 10%.
How does an 80/10/10 work?
First, almost every lender offers this type of financing. The importance of a credit score is still paramount to the success of any deal as it is for almost every financial transaction. And in my experience, repairing a credit score might take less time and effort than raising the 20% down payment.
The borrower opens a first mortgage for 80% of the loan value. The second number represents a second mortgage, which can be in the form of a home equity loan or a home equity line of credit (HELOC). The last number represents your down payment. It should be noted that these loans can be constructed in a variety of styles, such as 80/5/15 or even 80/15/5. You will put down the required 20%, borrowing a portion of it.
How does an 80/10/10 mortgage save money?
On the surface, it might seem as if it will cost more. The first mortgage will depend on current rates and the better your credit score, the more likely you will get the advertised rate. The second loan is often comes with a slightly higher interest rate and will be for a shorter term. The upside of this type of financing: The interest on the second mortgage is tax deductible.
The real savings in this type of arrangement comes with the absence of the PMI or MIP payments, which are not deductible and add nothing to the value of your home. In other words, those payments do not get applied to your loan’s value, which would add to your equity while decreasing your loan obligation.
How can we assist you today?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
Karen Marcy, Broker/Realtor
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
Mobile: 541-420- 3725 | Mobile: 541-420- 4018 | Mobile: 503-327- 9611 | Fax: 541-593- 5123
Licensed in Oregon