Nearly half of all first-time homebuyers got a loan to pay for the whole price of their home instead of making a big down payment. And the so-called 80/20 mortgage plan helped a lot of these buyers buy homes with no money down. This type of loan is relatively new, and it was made to help buyers who don't want to pay down payments. As home prices have gone through the roof, more and more people who have good credit and a good income find that they can't buy a home because they can't save enough for the large down payment. A 20 percent down payment on a home worth $200,000 is a huge $40,000. Mortgage companies started to offer the 80/20 option as a way to deal with this problem.
The 80/20 loan is sometimes called a "piggyback" loan because it is really two loans that work together as one. The first part works like any other and is for 80% of the price of the item. The second part, which is smaller, is a 20% loan. So, when you apply for a mortgage, the lender makes sure you can pay for 100% of the price of the house. Then, the loan is split into two parts.
For example, if you want to buy a $100,000 house, a 20% down payment would cost $20,000. With an 80/20 mortgage, the lender gives you $80,000 at one interest rate and the 20% down payment of $20,000 at a slightly higher rate, for a total loan amount of $100,000.
The mortgage is broken up into two different payments so that you can get the loan without a down payment. Usually, you need a 20% down payment to get an 80% loan, but this mortgage plan is so smart that the lender is letting you borrow your down payment. After that, the same lender can give you the rest of the loan.
Yes, it does sound a little bit made up, and it is a pretty complicated way to get a basic mortgage. But for people who want to avoid a big down payment, what really matters is that it works and helps them get over the down payment hurdle.
On the down payment or 20 percent of the loan, you can expect to pay higher interest rates. But the rates are still fair, and this type of loan lets you buy without having to save up a huge amount of money for a down payment. You can pay off the 20% loan later if you want to lower your monthly payments. Once a homeowner has lived in their home for a few years and built up equity, they often refinance and change their 80/20 mortgage into a more traditional type.
