The term 80/20 mortgage typically refers to a pair of loans that you take out in order to buy a home. Usually, it refers to taking out a conventional mortgage loan to pay for 80 percent of the house's value and a second loan in lieu of a 20 percent down payment to cover the rest of the house's value.
TL;DR (Too Long; Didn't Read)
An 80/20 loan is a way to pay for a home by taking out two loans: one for 80 percent of the purchase price and another one for the other 20 percent. It can save you money on a down payment and reduce the need to carry private mortgage insurance, but it can put you at risk of losing your home if anything goes wrong and lead to more money spent in interest.
Understanding an 80/20 Mortgage Loan
An 80/20 loan refers to a pair of loans that you can take out to buy a house. Often, mortgage lenders want you to pay at least 20 percent of the cost of a house as a cash down payment before they will issue a mortgage. If you don't have the money or don't want to do so, you may have to pay for private mortgage insurance, or PMI, which will help make the lender whole if you stop making payments.
PMI can be expensive, and some lenders have minimum required down payments even if you're willing to take out this insurance. One way to get around this is with an 80/20 mortgage, using the second loan to cover the balance on the home. In some cases, you might take an 80/15/5 or 80/10/10 split instead, borrowing 10 percent or 15 percent on the second loan and paying a typical down payment for the balance.
Remember that if you take out two loans, you must pay each of them, usually separately. The second loan, sometimes called a piggyback loan, often charges a higher interest rate.
Risks of an 80/20 Mortgage
A risk with an 80/20 mortgage is that you may fail to be able to pay it and end up losing your house. This possibility might be higher with an 80/20 mortgage, with a higher total monthly payment, than with a single loan. On the other hand, you may be able to save some cash for emergencies that you would have otherwise spent on a down payment.
There's also a danger that you could end up owing more on your mortgage than your home is worth if the price drops. This situation is sometimes known as being underwater, and it means that if you sell your home or are foreclosed on, you will effectively get nothing, since all the equity will go to the lenders.
Another risk is even simpler: That your primary mortgage lender may not allow the piggyback loan for 20 percent. Especially after the mortgage crisis in 2008, some lenders simply refuse to do so.
Alternatives to an 80/20 Loan
The most basic alternative to taking out an 80/20 loan or other piggyback loan is to pay a down payment, but not everyone can afford to do so. You can also look for special programs to assist homebuyers, such as those offered to first-time homebuyers or veterans of the military. Some of these may allow loans with a lower down payment or give you out-and-out grants of money to use toward your home purchase.
Another option is to take out PMI. Your lender or mortgage may work with you to find an insurer here. You'll usually have to carry the insurance and pay the premium until the balance on the mortgage is at most 80 percent of the home value.
- Mortgage 101: How 80/20 Loans Work
- Mortgage 101: The Ups and Downs of 80/20 Loans
- SmartAsset: The Pros and Cons of a Piggyback Mortgage Loan
- Bankrate: PMI: Learn the Basics of Private Mortgage Insurance
- Investopedia: 80-10-10 Mortgage
- Investopedia: 5 Types of Private Mortgage Insurance – PMI
- CFPB: What Is Private Mortgage Insurance?
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.