Understanding 80-10-10 Loans
An 80-10-10 loan, also known as a piggyback loan, is a mortgage financing strategy that allows homebuyers to avoid paying private mortgage insurance (PMI) while putting down less than 20% of the home’s purchase price. This structure involves taking out two loans simultaneously along with a cash down payment.
How the 80-10-10 Structure Works
The numbers in “80-10-10” represent the three components of the financing:
- 80% — First Mortgage: The primary mortgage covers 80% of the home’s purchase price. This is typically a conventional mortgage with favorable interest rates.
- 10% — Second Mortgage: A second mortgage, usually in the form of a home equity loan or home equity line of credit (HELOC), covers an additional 10% of the purchase price.
- 10% — Down Payment: The buyer provides 10% of the purchase price as a cash down payment.
Benefits of 80-10-10 Loans
This mortgage strategy offers several advantages for homebuyers:
- Avoid PMI: Since the first mortgage is only 80% of the home’s value, PMI is not required, potentially saving hundreds of dollars per month.
- Lower Down Payment: Instead of the traditional 20% down payment, buyers only need 10% in cash.
- Tax Deductible Interest: Interest on both the first and second mortgage may be tax deductible, subject to current tax law limitations.
- Flexible Second Mortgage: The HELOC portion can often be paid down and redrawn as needed.
Considerations and Risks
While 80-10-10 loans offer benefits, there are important factors to consider:
- The second mortgage typically carries a higher interest rate than the first mortgage.
- You will have two separate loan payments to manage each month.
- If using a HELOC, the interest rate may be variable, meaning your payments could increase over time.
- Not all lenders offer piggyback loan structures.
Is an 80-10-10 Loan Right for You?
An 80-10-10 loan may be a good option if you have strong credit, can afford the 10% down payment, and want to avoid the ongoing cost of PMI. However, it’s important to compare the total cost of this structure against a conventional mortgage with PMI to determine which option saves you more money over time.