Mortgage 80 20 Home Loan: Refinance Procedures Clarified

What Is An 80 20 Home Loan?

This is when a borrower takes out a normal mortgage for 80% of the property cost and has a second loan for the remaining 20%. It also called a "piggy back" loan.

So, it can be seen the process is a combination of 2 completely separate loans to arrive at a total of 100% for the cost of the property being purchased. The loans are very likely to have different interest rates and can even be from 2 separate mortgage companies.

Market Conditions Dramatically Affect 80 20 Loans

It is worth noting that at the present time, due to the practices of the financial sector causing a global fiscal depression, 80 20 home loans are generally no longer available. At least, they are not available to the "average" man and woman on the street.

80 20 loans are very susceptible to economic fluctuations. This type of loan can be referred to as "creative" financing and is an option with lenders competing for business made available during a strong economy and rising house prices. It makes no sense to offer an 80 20 home loan when house prices are falling and the sales market is depressed.

The main reason home buyers go for the 80 20 Home Loan is that funds are generally limited and they can get the home they desire with no down payment and no PMI (Private Mortgage Insurance). It is worth knowing that if the ratio of Home Loan/Property Value exceeds 80%, then your mortgage lender will require PMI.

If the home buyer has sufficient cash it is possible they may be looking to invest elsewhere which means that an 80 20 loan would free up this surplus capital for investing.

Higher Interest On An 80 20 Home Loan

People will undoubtedly pay higher interest charges when funding a home with an 80 20 loan option. Generally a lender will view the application as an increased risk and additionally the 20% portion of the home loan will have a higher interest rate because the lender is in second position to recover the money if the mortgage goes into default.

Consider that interest is being paid on 2 separate loans so even if the 20% is for a short term loan the actual costs will be greater than a conventional mortgage. For many home buyers a monthly payment is approximately equivalent to 28% of their gross income. Quite often the second loan can push people past this level and it has to be decided if the repayments on both loans are manageable.

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80 20 Home Loan Equity Issues

With a standard home loan assuming a 10% down payment a house buyer instantly has a 10% equity in the property. With an 80 20 Loan the buyer has no initial equity at all. Equity is built by reducing the principle on both loans and this will be a slow process as the initial interest payments are heavily weighted. Also consider that any downturn in the property market can bring about a negative equity situation which means that possible refinancing under more favorable terms will not be possible.

Major Benefits Of 80 20 Home Loans

No initial down payment. In effect this can mean almost 100% financing although closing costs may have to be paid or the seller can help with a credit.
Can Avoid Private Mortgage Insurance. PMI is a protection put in place for the lender in case there is a default on the home loan payment. PMI is actually a requirement if purchasing a property where the buyer finds 20% or less. Using an 80 20 loan to split the mortgage negates the requirement for PMI which can save a substantial amount of money every month. PMI can run from around 0.4% up to as much as 2.25% of the amount of the loan.
Lower Interest Rate For The 80% First Mortgage. It is quite possible that the interest on the first mortgage may be less than if someone had taken out a traditional 100% mortgage. It is a certainty that the interest rate on the second mortgage or 20% loan is going to be more, but it is worth considering that this part of the loan, being for a smaller amount, should be paid of relatively quickly. Once this is paid off the existing rate should be up to 2.5% lower than for a traditional mortgage.

Disadvantages Of An 80 20 Home Loan

The closing costs on the loan tend to be more expensive, since you are closing two loans at once. Overall, you will pay higher total costs to close.
There can also be a substantial loss if your home loses value. If the financing is at 100% the chances are slim that the property can be sold as there are not sufficient funds available to pay off the loan.
The applicant must have good credit before being able to qualify for 80/20 loans.

If you have a friendly loan officer that you trust implicitly then it is wise to seek their counsel and take their advice. For most people however, the finance industry has not shown itself to be a beacon of virtue and it is well worth investing a small amount of cash in an unbiased publication, written by experts, to arm yourself with real facts so you are in a position to question any recommendations and understand exactly what direction you are being steered toward.

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