80 20 mortgages are a method of buying a home without a large down payment while avoiding private mortgage insurance. 80 20 mortgages can allow you to purchase a home faster and can save you money, but they can be risky as you have no equity in your home.
How Do 80 20 Mortgages Work
When you buy a home, you are normally expected to put down a 20 percent down payment. This down payment protects the lender. If you do not put a down payment on a home, then you owe 100 percent of the value of the house. If property values fall, you could end up owing more on the house than it is worth. Since the lender uses the house as collateral to secure the loan, this would be problematic for the lender as now the asset that guarantees the loan is not worth as much as the loan. When you put 20 percent down on a home, you are much less likely to end up owing more than the home is worth, so the bank is protected.
If you forego the down payment, in order to protect itself, the bank has created an alternative requirement called private mortgage insurance (PMI). This protects the lender in the event that you default or stop paying your mortgage. You are required to pay the monthly fees for private mortgage insurance until your equity in the home (the part of the home you own) reaches 20 percent.
In order to avoid these monthly PMI payments, many lenders will opt for an 80 20 loan. This means they will borrow 80 percent of the value of the home in one loan, and take a 20 percent second mortgage for the other 20 percent. This 20 percent second mortgage can be from the same lender or from a different lender.
You will have to qualify for both the first and second mortgage and you will need to pay closing costs and fees for both loans in most cases. Usually, the fees associated with the second mortgage are lower, especially if you use the same lender, since you already have an appraisal, title search and other generic mortgage documents from taking out the first mortgage.
Should You Take an 80 20 Loan
Taking an 80 20 loan can help you buy a house faster. If property values are projected to rise or if you feel this is the most optimal time for you to buy a home and you do not have a down payment, an 80 20 loan can be a good solution.
However, remember that any time you have a home with no equity, you are at risk if property values do fall. If you end up owing more on your home than it is worth, you may be unable to sell your home or refinance your mortgage should the need arise, unless you can come up with the cash to make up the difference between what you owe and what your home is worth. Therefore, you should think carefully before taking an 80 20 mortgage to ensure that you will be staying put for a few years, that property values will rise, or that you have a cushion in your budget in case you need to sell your home.
No comments:
Post a Comment