80-10-10 Mortgage Loan Programs - How Do They Work?

An 80/10/10 mortgage loan program is a type piggy back loan that borrowers will sometimes use to avoid paying private mortgage insurance. The fees on this type of mortgage insurance can be as high as 1% of the total value of the property each year, and borrowers are eager to avoid the expensive monthly payments if possible.

Most banks or lending institutions will insist that a borrower take out private mortgage insurance of they do not have a deposit equal to 20% of the home's appraised value. If you can deposit this much, you will not need the expensive insurance, and additionally, once your repayments have contributed 20% of the homes value then you will no longer need to continue paying for the insurance.

Many people will avoid this insurance obligation with an 80/ 10/ 10 mortgage loan program. In this type of mortgage program, the mortgage covers 80% of the appraised value, the borrower contributes 10% of the appraised value and the borrower also contributes an additional 10% of the appraised value through another loan taken out for that amount.

This second or piggy back loan will raise the down payment to an amount that will not necessitate the private mortgage insurance.

The second 10% on the house will not be protected by the homes value as collateral, and as a result you will pay a higher interest rate to secure this loan, as compensation for the bank's increased risk. The loan can be offered by the same bank that is issuing the mortgage or can be issued through a different lending institution.

This has been considered a money saver, especially as loan payments are tax deductible but mortgage insurance payments were not. New legislation enacted this year has clouded the water slightly, and homeowners may be eligible to deduct their mortgage insurance payment as well, depending on their income and geographical area.

Borrowers are well advised to take the time and do a long term payment calculation comparison of the two options. The piggy back loan option is not always the cheaper way to go.

Some people who are seeking financing on very large and expensive houses will also seek out an 80/ 10/ 10 mortgage loan to avoid entering the considered Jumbo loan realm, and to avoid the higher interest payments associated with this type of loan. A loan of more than $300 000 is at risk of additional interest premiums. Speak with a financial advisor about the options available in your state.

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