80-10-10 Loans: When Two Mortgages Are Better Than One
The property market can be a complex place at the best of times, with people often looking to simplify their options in order to make things easier to manage. When it comes to mortgages, however, the complex solution can potentially save you a lot of money. Sometimes, two mortgages are better than one. While taking out a second mortgage might seem like a counter-intuitive way to save money, an 80-10-10 loan can be a powerful way to avoid the costs and pitfalls associated with a jumbo loan.
What is an 80-10-10 loan?
Also known as a combination loan, piggyback loan, or eighty-ten-ten loan, this kind of arrangement is structured as two independent mortgages with a single down payment. While 80-10-10 is the most common ratio, it’s important to note that this type of mortgage arrangement is independent of the numbers involved. For example, people often get 75-15-10 loans to buy condominiums or take advantage of lower rates. Regardless of the ratio used, the first number represents the primary mortgage, the middle number represents the smaller secondary mortgage, and the third number represents the initial down payment.
How do I get an 80-10-10 loan?
In order to take advantage of an 80-10-10 loan, you need to be prepared for some added complications. First and foremost, you need to understand that you are actually taking out two separate loans. While this arrangement is similar to combining two separate mortgages under a single umbrella, you still need to apply for two individual loans, often from separate lenders.
If you want to take out a combination loan, the first thing you’ll need to do is define and apply for a primary mortgage. Once your primary lender knows that you want an 80-10-10 loan, you can ask them to request referrals for lenders who may be interested in offering you a second mortgage. While some lenders specialize in these types of agreements, others will be reluctant to get involved. In this type of arrangement, the secondary mortgage may be a home equity line of credit (HELOC).
Advantages of using a mortgage broker for an 80-10-10 loan
Applying for two loans can be complicated, with two sets of financial documents required, two loan applications needed, and two closings to organize. A mortgage broker can be incredibly valuable during this process since they can compare lenders and process the details of your combination loan in a single step. Working with a mortgage broker opens you up to more options as brokers are already dealing with multiple lenders as part of their normal operation.
Cons of an 80-10-10 loan
As mentioned, perhaps the biggest disadvantage of taking out a combination loan is the extra complexity and work involved. Along with doubling up on applications and closings, it may also be more difficult to refinance the mortgage or build equity due to the unconventional nature of the arrangement. For example, refinancing the mortgage will require the consent of both the primary and secondary mortgage lenders. Because HELOC interest rates are variable, they can also go up over time, which makes it harder to build equity when making interest-only payments.
Pros of an 80-10-10 loan
Despite the additional complications and challenges, taking out a combination mortgage offers a number of advantages over a jumbo loan. If you decide to go the two mortgage route, you will be able to steer clear of mortgage insurance, which is necessary when a loan amount is more than 80 percent of the value of the home. This is one of the reasons why 80-10-10 loans have been popular over the years—borrowers are able to take advantage of a loophole in the lending rules.
If the second loan is a HELOC and you have a credit score of 740 or higher, a combination loan may be cheaper than a conventional loan with Private Mortgage Insurance (PMI) during the first 10 years while the HELOC is interest-only. In addition, combination loans allow borrowers to avoid the strict lending requirements associated with jumbo loans. This can improve your chances of getting better mortgage rates by using the secondary mortgage as a down payment supplement. If you think that an 80-10-10 loan is the right solution for you, speaking with First Capital Trust Deeds is the perfect place to get started.