Many renters want to buy their own home, but they can't because they don't have enough money for a down payment. If you can pay the same amount each month for a house payment as you do for rent, an 80-20 no money down loan could help you get out of the rent trap. (80% for the first mortgage and 20% for the second) "It lets people buy without a down payment or if they don't want to use their savings to buy a house," says a mortgage expert. "A lot of young professionals are coming in," he says. "People who have good jobs and are out of college. They have good credit, but they haven't been able to save much money yet."
People also call the 80-20 loans "piggyback loans." The buyer gets a loan for 80% of how much the house costs. Then, he or she gets a second mortgage for 20% of the loan amount to use as a down payment. The buyer has three choices for the 20% of the loan that he or she needs to pay. Most of the time, the 20% loan comes from a different lender, but keep an eye out for a higher interest rate on the second loan.
MortgageDaily.Com says, "The second lender, who is only funding 5% to 20% of the loan, doesn't see much benefit in lending the money unless he can get a high interest return." If the buyer borrows from the same bank, they could open a home equity line of credit and take out two different amounts, one for 80 percent of the loan and the other for the "down payment."
The third option is to borrow the remaining 20% of the loan directly from the seller. This is called a "purchase money loan." Kipplinger.com shows that the 80-20 loan has a downside. "You will probably have to pay a higher interest rate, buy private mortgage insurance (borrowers usually pay 20 percent of the home's value to avoid this), and make bigger monthly mortgage payments. Plus, being so heavily in debt can be dangerous. But if homes are too expensive, it may be the only way to buy one.
Doug Duncan, chief economist of the Mortgage Bankers Association of America, says, "Most banks offer special mortgages to low- and moderate-income borrowers because the Community Reinvestment Act requires financial institutions to give a certain share of business to these economic groups." But it's harder to find jumbo loans (those for more than $300,700) with no or little down payment.
The fact that there is no mortgage insurance built into an 80-20 mortgage can sometimes make up for the higher interest rate. Only home loans with a loan-to-value (LTV) of more than 80 percent are required to have mortgage insurance in the state of California. With an 80-20 loan, the homeowner doesn't have to pay for insurance, so their monthly payment is lower.
If your goal with an 80-20 loan is to pay less on your mortgage each month, the T.A.M.I. programme is another option. The T.A.M.I. programme includes mortgage insurance, but the 80-20 programme does not. Robin M. Root, a senior-level loan officer, says that the T.A.M.I. gives lender-based mortgage insurance in exchange for a slightly higher interest rate. Since the IRS lets you deduct all of the interest you pay on a home loan, you can also deduct the cost of mortgage insurance. And, unlike the 80-20 loan programme, when the buyer has built up equity, the homeowner has the freedom to open a home-equity loan for home improvements or cash emergencies.
