Many home buyers can’t afford the requisite 20% down payment in order to avoid paying private mortgage insurance (PMI). However, their credit is in good standing and all other factors point to them being a good mortgage loan candidate. This situation is precisely why the 80-10-10 (otherwise known as a “piggyback loan”) was invented during the housing boom of the late 1990s and early 2000s.
It fell out of favor during the mortgage crisis, but it is gaining steam once again with the economy continuing to recover. Home values are up and mortgage interest rates remain low, so piggyback mortgages are now a valid option for some borrowers who don’t have huge down payments but want to avoid PMI.
What is a Piggyback 80-10-10 Mortgage?
First, let’s explain further what this type of mortgage is. As the name would suggest, it’s actually two loans piggybacking on top of one another. The borrower will take out a primary mortgage loan along with a second mortgage or home equity line of credit (HELOC) equal to 80% and 10% of the home’s value, respectively. The numbers aren’t always exactly an 80-10-10 split, but that is basically the standard breakdown as follows:
80% = Percentage of the home’s value that the primary mortgage will cover. It typically must be less than or equal to 80% in order to avoid PMI.
10% = This is the secondary percentage of the purchase price that is covered by the second mortgage, home equity loan or home equity line of credit. It will have a higher interest rate than the primary mortgage, but it won’t require PMI.
10% = This is the amount the borrower will need to supply as the down payment.
80-15-5, 80-5-15 and 75-15-10 are some of the other common ratios we might see for a piggyback mortgage loan.
What is Private Mortgage Insurance (PMI)?
If you do not have 20% down toward the primary mortgage amount, you will be required to pay private mortgage insurance. This is protection for the lender in case your home goes into foreclosure. Having a larger down payment helps prevent such challenges with the loan. So, until are at least 20% paid off, you will have to pay an additional PMI payment with your monthly mortgage bill. The amount of PMI payments will vary based on the size of your loan.
Pros and Cons of a Piggyback Mortgage
As you might expect with this more complex loan arrangement, there are some pros and cons that you need to understand before considering a piggyback 80-10-10 mortgage.
- Bigger Loan. You can purchase a larger or more expensive home with a piggyback loan. A larger combined loan could enable you to afford more.
- Lower Monthly Payment. Without PMI, your monthly mortgage payment may be lower, even with the secondary loan you’ll be paying off concurrently.
- Smaller Down Payment. You can get a good home and primary mortgage terms without having to put down as much upfront.
- Tax Deduction. The interest on the secondary loan is tax-deductible up to $100,000.
- Good Credit Required. You must have really good credit to approve for a piggyback style loan.
- Higher Interest Rate. The second mortgage or home equity loan will have a higher interest rate. Make sure your monthly payment is less than the PMI would be.
- Closing Costs and Fees. Remember you will be paying closing costs and fees on two mortgage loans instead of just one, so the upfront expenses can add up.
- Tax Benefits. The interest on the second loan is only tax deductible up to $100,000, so if that loan is larger it may not be cost effective. Also, your income limits may allow you to deduct PMI payments. Depending on what you make and what your PMI payments are, a piggyback mortgage may not make as much sense as a traditional loan with PMI.
Make the Right Mortgage Decisions
Piggyback mortgages can be complicated, but they can be feasible if all the circumstances are right. It’s important to understand all your mortgage options and make the right decisions for your short- and long-term financial health. That’s why you’ll want to talk with the mortgage experts at Transparent Mortgage. Call us today at (619) 929-0199.