What Is 80-10-10 Mortgage?

A comprehensive guide to understanding the 80-10-10 mortgage strategy, its benefits, and practical examples.

The 80-10-10 mortgage, also known as a “piggyback” mortgage, is a financing arrangement commonly used by homebuyers. This structure involves three components:

1. An 80% conventional mortgage.
2. A 10% home equity loan or second mortgage.
3. A 10% down payment made by the buyer.

This strategy allows buyers to avoid private mortgage insurance (PMI) and manage their finances more efficiently.

Key Benefits of 80-10-10 Mortgage

Avoiding PMI

One of the significant advantages of the 80-10-10 mortgage is the ability to avoid PMI, a premium typically required when the down payment is less than 20% of the home’s purchase price.

Financial Flexibility

By diversifying the financing sources, buyers can potentially access more favorable interest rates and terms, thus enhancing their financial flexibility.

Tax Advantages

Interest on home equity loans may be tax-deductible, providing additional financial benefits to the homeowner.

Practical Examples of 80-10-10 Mortgages

Example 1: Basic Application

Consider a homebuyer who wants to purchase a $500,000 house. They would structure their financing as follows:

• $400,000 from an 80% conventional mortgage.
• $50,000 from a 10% home equity loan.
• $50,000 as a 10% down payment.

Example 2: High-Property Value Scenario

For a costly property, say valued at $1,000,000:

• $800,000 would come from an 80% conventional mortgage.
• $100,000 from a 10% home equity loan.
• $100,000 as a down payment.

Historical Context of 80-10-10 Mortgage

The 80-10-10 mortgage gained popularity in the early 2000s when real estate prices were soaring, and buyers sought to optimize their financing strategies. This method offered a way around the high cost of PMI and allowed for greater investment opportunities.

Special Considerations

Credit Requirements

Both the conventional mortgage and the home equity loan will typically require a strong credit score to secure favorable terms.

Combined Loan-to-Value Ratio (CLTV)

Lenders consider the CLTV in determining eligibility and terms for the home equity loan. In an 80-10-10 mortgage, the CLTV would be 90%, meaning that buyers keep this ratio in mind when evaluating their financing options.

Related Terms

• Private Mortgage Insurance (PMI): Insurance required for conventional loans where the down payment is less than 20% of the home’s purchase price.
• Home Equity Loan: A type of second mortgage that uses the borrower’s home as collateral.
• Conventional Mortgage: A mortgage loan that is not insured or guaranteed by the federal government.

FAQs

What credit score is needed for an 80-10-10 mortgage?

A strong credit score (typically 680 or higher) is usually required to secure favorable terms for both the conventional mortgage and the home equity loan.

Can the 80-10-10 mortgage be used for investment properties?

While primarily used for primary residences, the 80-10-10 mortgage structure can sometimes be applied to investment properties, although terms might differ.

Is the interest on the home equity loan tax-deductible?

Yes, in many cases, the interest paid on a home equity loan can be tax-deductible, although specific tax situations vary.

References

1. IRS. Publication 936 (2022), Home Mortgage Interest Deduction. Retrieved from IRS.gov
2. U.S. Bank. Home Equity Loan Options. Retrieved from USBank.com

Summary

The 80-10-10 mortgage is a strategic financing option that offers significant benefits including the avoidance of PMI, financial flexibility, and potential tax advantages. By understanding the structure and its implications, homebuyers can make more informed decisions and optimize their home financing strategy.