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Mortgages 80/20 Require a Secondary of Piggyback Loan Staff - Mortgage Lenders Plus.com

An 80/20 mortgage is the traditional homebuyer’s model, the loan that our parents and grandparents took out on the old homestead. What the numbers mean is that the borrower is providing a down payment equivalent to twenty percent of the home’s value and borrowing the other eighty percent. Fifty years ago, people could conceivable save twenty percent of a modest home’s value before purchasing. Twenty five years ago, with the right set of parents a couple could “borrow” the capital to plunk down a twenty percent payment on a starter home or a condo.

Today, housing costs have made traditional 80/20 loans much more difficult to assemble in traditional fashion – which has required the financial industry to come up with some creative methods of providing “virtual” 80/20 mortgages.

While there are many home loans available today that don’t require a twenty percent down payment, there is considerable consumer value to obtaining an 80/20 mortgage. If your credit rating is decent, a twenty percent down payment will qualify you for a fixed rate mortgage at the best available interest rate. With a lesser down payment, your options are going to be either an adjustable rate mortgage or a fixed rate with a considerably higher interest rate.

Another factor that makes the 80/20 mortgage attractive is the fact that lenders today require mortgage insurance on any loan that is for more than eighty percent of the home’s value. Mortgage insurance is a policy that the borrower takes out and pays for, in order to insure repayment on the loan in case of foreclosure. It can amount to as much as $1,500 per year on a $200,000 loan – it’s a substantial additional expense. Mortgage insurance is required until such time as the borrower has paid down the principal on the mortgage to the point where he holds 20% equity in the home, at its current appraisal value.

In order to qualify for the 80/20 mortgage perks, many people will take out a secondary or “piggyback” loan to provide sufficient capital for a twenty percent down payment. A piggyback loan has a higher interest rate than the principal mortgage – usually two to two and a half percentage points higher – and is usually five to fifteen years in duration. Nevertheless, it gets the borrower a lower rate on the primary loan and avoids the obligation of mortgage insurance.

Until very recently, mortgage insurance payments were not tax deductible – however the Congress made them deductible in a law that took effect in January of 2007. Despite the deduction, mortgage insurance is a burden that will be of several years duration and one worth avoiding, if you can arrange an 80/20 mortgage.