80/10/10 Mortgage - Is an 80/20 Mortgage a Good Idea?

There are many ways to buy a home, and several more if you want to get a mortgage. Now, home loans and mortgages commonly come in the form of long-term plans, such as 30-year loans. These enable you to spread your EMIs over a huge period of time, thereby decreasing the risk of spending a huge amount in a short time. However, you still need to give the EMIs, and the longer your loan term is, the more you pay in total. There are other options apart from this.

Here’s another common option: You put 10% of the home’s cost as down-payment to book the property, while the rest 90% you pay with the aid of a loan. But here’s one thing to remember: if the down payment is less than 20%, you need to pay private mortgage insurance in addition to the interest and principal for the loan. As you can see, this also forces you to part with a larger EMI at the end of each month. Larger loan amounts and their additional mortgage insurance can make your dream of owning a dream home just that, a distant dream.

 But there is another choice, and this one is not as bleak as the ones before it. This is called the 80/10/10 mortgage, or the piggyback mortgage loan. This type allows you to get a home that you want and even avoid private mortgage insurance. All that by giving just 10% down payment! However, there are some small drawbacks.

However, first we shall explain how this mortgage type works, and then state the pros and cons.

How does it work?

Firstly, you need to choose a lender who will work with you, and who shall underwrite the loan type. Here’s when you’ll give the 10% down payment in cash in return of the first mortgage plan for 80% of the property’s purchase price, and a second mortgage loan for just 10% of the purchase price. Here’s where it gets interesting. The second mortgage “piggybacks” above the original mortgage loan. 

This is indeed similar to the 20% down payment plan as you do not need to pay PMIs. However, the 80/10/10 mortgage is still a form of debt and you need to make installments monthly on time, and ultimately repay it. Actually, you’ll be making two monthly mortgage payments per month. 

Pros of a 80/10/10 mortgage

• It allows you to buy a home with fewer down payments.

• It enables you to avoid paying PMIs as monthly payments.

Cons of 80/10/10 mortgage

You need to repay two mortgages, which means paying two EMIs per month for the two mortgages, and that the rates can rise in the future. 80/10/10 mortgage interest rates are higher than primary mortgages. Origination fees, principal and interest all need to be paid.

These loans have adjustable interest rates, and that means these can go up. Added costs and higher interest rates can certainly pose more problems

Deciding on taking a 80/10/10 mortgage is not a light decision. You need to calculate the expenses over time, and how it compares to other mortgage options. Also know that this option is given to borrowers selectively.