If you are a homeowner looking for 100% mortgage financing, you will probably need to find a lender that offers 80/20 mortgages to cover the full amount you need to borrow. Here are the basics of 80/20 mortgages and what you need to know before borrowing.
Mortgage lenders that offer 100% financing usually offer the loan in the form of an 80/20 mortgage. An 80/20 mortgage is actually two loans, the first mortgage for 80% and a second for the remaining 20%. This second mortgage is often referred to as a “piggyback loan.”
Using an 80/20 mortgage to purchase your home is a good way to avoid paying Private Mortgage Insurance, or PMI. This PMI can add hundreds of dollars to your monthly mortgage payment if you are stuck paying it. Using an 80/20 to finance your home carries more risk to the borrower because you have very little equity to serve as a cushion; this becomes a problem with the value of your home declines.
An 80/20 mortgages usually carry two different interest rates; you will have one interest rate for the primary mortgage and a second interest rate for the second mortgage. Your lender may or may not combine these payments. It is important to keep up on both payments as both are secured by your home. If you fall behind on the payments for either mortgage the lender could foreclose and take your home.
Using an 80/20 mortgage to finance your home can be a convenient way to purchase your home if you don’t have enough cash to make a 20% down payment. You will pay a premium for this convenience in the form of higher interest rates and lender fees. It is important to understand all fees and conditions before you take this mortgage as this will help you evaluate the level or risk associated with this type of mortgage. To learn more about your mortgage refinancing options and how to avoid common homeowner mistakes, register for our free mortgage guidebook “Five Things You Need to Know before Refinancing Your Mortgage.”