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LOAN SERVICING

What are the Pros and Cons of Buying a Home With An 80 10 10 Loan?

 

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You might have heard that you can buy a home without a 20% down payment – you may have even heard it from us in our video “What is a FHA Home Loan?”

It’s true. Those who qualify can utilize an 80 10 10 loan, otherwise known as a second trust loan or “piggyback” loan, to purchase your home with just a 10% down payment.

Here’s how it works:

  • Finance 80% of the home’s value,
  • Put 10% as a down payment, and then
  • Finance the remaining 10% as a second trust loan or a piggyback loan.

That’s why it’s called an 80 10 10 loan.

What Are the Pros of a 80 10 10 Loan?

The three main pros of an 80 10 10 loan are:

  1. The piggyback mortgage doesn’t require mortgage insurance or PMI. This can be up to 1.5% of the cost of the mortgage value depending on your credit score and down payment. So, you may spend less on the 2nd trust than you would with mortgage insurance.
  2. You may be able to deduct the interest from both loans on your taxes (though you’ll need to consult a tax advisor to determine what, if anything, may be deducted).
  3. It allows you to keep the total mortgage value at or below a “conforming” mortgage loan – which can be helpful when purchasing a home in more expensive areas and help keep the interest rate down.

What Are the Cons?

The two main cons of an 80 10 10 loan are:

  1. The second trust is typically financed with a shorter term and at a higher, variable, interest rate.  This means that the payments may adjust over the term of the loan.
  2. There may be closing costs on the second trust, though they’re typically not much.

Even if you have the 20% down payment, it may be worthwhile to research your options. Using less of your money as a down payment could allow you to possibly pay down debt, apply it to home improvements, help pay for closing costs or even moving expenses.

Always speak with an experienced mortgage loan originator so you can discuss the option that is best suited for you – and really challenge them on what is available to meet your needs, whether it is a low down payment, a maximum monthly mortgage amount for your budget, or both.