An 80 20 mortgage is another way to get 100% financing on a house purchase. This article will discuss how 80 20 mortgages work, some of the benefits of this type of mortgage and some things to watch out for.
The 80 20 loan is effectively two loans. The first loan is for 80% of the value of the house you are planning to buy. The second loan is for 20% of the value of the purchase price. Thus by using the two 80 20 loans you have the total sale price of the house without having to find any lump sum down payment.
This can be useful to people that have a good credit history and regular income but do not have a large amount of money saved up to put a deposit down on a house. It might include young people with good regular income through a job that have not had time to save up a deposit but see house prices rising and think they will be priced out of the market. Typically they are renting an apartment or house and the amount they pay on the rent will be comparable to the mortgage they will have with an 80 20 mortgage. Another group of people that would find this type of mortgage useful would be people investing in a second house but did not have any capital available because it was invested in other things.
80 20 mortgages work as such : 80% of the mortgage will be a traditional loan. It can be either a fixed rate, variable rate or interest only product. Any mortgage that is more than 80% of the value of the home requires a private mortgage insurance (PMI). Thus by getting the extra 20% of the cost of the house, the person doesn’t have to purchase PMI. The 20% part of the loan, sometimes referred to as a ‘piggyback’ loan, will be a few percentage points above the prime rate and will adjust with the prime rate. The 80 20 mortgage rate varies according to the company that offers the loan and the applicants financial circumstances. It is advisable to shop around as these rates can vary.
The obvious advantage of this type of mortgage is that you don’t need to find a large deposit of money to buy a house. You can purchase a house with virtually no money down (closing costs still have to be found by the purchaser).
The main downside of the mortgage is that you have effectively borrowed all the money to purchase the house so if the value of the house was to fall you would be in negative equity. You would owe more money than the house was actually worth. If the housing market was particularly volatile and the values of houses were dropping you could find yourself in debt. Traditional mortgages generally require a 20% deposit to protect their investment in you and to protect you from the vagaries of the housing market.