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80/20 Loans explained
What is an 80/20 loan?
An 80/20 loan consists of two loans an 80% first mortgage and a 20% second mortgage. There are variations of this loan such as an 80/15; an 80/15 loan means that you either have a 5% down payment or when you refinance you have 5% equity in your home. The percentages are based off of your total loan to value. Total loan to value is based off of the amount your home is worth. When purchasing a home your loan to value is determined by the purchase price of the home.
Why are there 80/20 loans?
Loans have continually been evolving. The mortgage industry is very competitive and lenders are constantly looking for ways to get prospective homebuyers (their clients) into homes at reduced risk to them and increased profits. The 80/20 loans were designed to do just that and with the increase of these loans the United States saw a huge increase in the amount of home buyers in the market place. It was a way to sale loans on the secondary market where they could sale the low risk 80% first mortgage very easily. For home buyers it typically gave them the lowest payment possible which allowed them to get a loan on a house they previously wouldn’t dream of.
A lot of lenders got very aggressive trying to get anyone who wanted a home into a loan. These lenders developed all sorts of creative loans to get prospective buyers into homes. These lenders were willing to take on risk since many investors were buying these low risk 80% first mortgages. Unfortunately now days we have found that these loans aren’t low risk if a buyer can barely afford the loan. Also if it is adjustable what happens when it adjusts? Well if ones credit is not good finding a loan that has a payment, which can be affordable, may be impossible to find. Therefore the homebuyer is stuck with the loan that adjusts. Use the loan comparison calculator on this site to see how that will affect you. Also if you are not sure how your loan will adjust read the mortgage note article. If you are pushing your limit with being able to afford your house make sure you have available credit to you if an emergency occurs and check out Credit help/risk factors. Think ahead!
Should I take an 80/20 loan?
You should take whatever loan meets the most of your goals. If one of the primary goals is having a low payment you should consider an 80/20 loan. You may also want to consider Interest only loan. Often times if you are at the maximum loan to value these loans may be your best option for a low payment. Consult with a mortgage professional for more detail.
Useful links
Mortgage note/ adjustable rates
Credit help/risk factors
Mortgage Calculators:
Interest only Comparison Calculator to standard payment
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