80 20 Mortgage
80/20 Mortgages are offered as a means of avoiding private mortgage insurance (PMI). Usually lenders who offer 100% financing tend to break down the loan into two pieces. The first loan is for the initial 80% amount and the second loan to cover the last 20%. The reason for breaking up the loan is that it spares the borrower the need to pay private mortgage insurance (PMI) on either of the loans. A normal 100% loan will have an additional charge in order to compensate the lender for the usual risks involved in 100% financing.
This additional charge is charged from the borrower as a PMI charge and 80/20 mortgage is a way to evade this nagging charge. If a lending agency offers a 100% loan then they will receive no equity cushion in the event the property value crashes. Some lending agencies are known to offer a 100% loan without charging any PMI charges, but they usually charge a higher interest rate to compensate for this. 80/20 loans will have a specific interest rate for the initial 80% and a slight higher rate for the next 20%.
It must be kept in mind that both the loans come with different risk profiles. For instance the lender is allowed to sell the different loans to two varying types of loan investors.
The 80% is usually sold to borrowers with a lower risk taking capability while the 20% is given to people with a higher appetite for risk. The initial 80% loan gives it the first dibs on property in case the loan goes under. These are paid first and in the event there is any money left then the final 20% is paid. The 20% loan has a secondary nature to it which requisites the need for a higher risk in order to compensate for the increased risk. The 80/20 loan is basically a loan structure and the loan itself can take many forms. The initial 80% can either be an interest only loan, a regular loan or even a 30 year fixed loan. The second 20% can also come take different forms; most people opt for the interest-only type in order to keep the cost down.
There are numerous advantages associated with 80/20 loans, even though the interest rates are on the higher side, it comes out to be much lower compared to a conventional loan including the PMI. The disadvantage is that the borrower will in all likelihood pay two closing sets as the loan usually comes from different mortgage lenders. Since the home becomes entirely financed, in the event it loses value the borrower will not be able to sell the home or even refinance it till the full loan is paid back. Having said that, this is an excellent loan opportunity for people who lack the down payment required for other types of mortgages. Any conforming borrower will be spared from the pay mortgage insurance by opting for 80/20 loans.Mortgage insurance is pretty much requited if you possess less than 20% down, and 80 20 mortgage can save you of this necessary evil.
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