80/20 Combined Mortgage and Second Mortgage?

By Amanda Hash

You may have read about the benefits of 80/20 Loans but you may not fully understand how they work. The fact that these loans are actually a combination of loans brings a lot of confusion to the issue and can scare applicants away from an otherwise excellent opportunity of financing that can save you a lot of money.

home loans are combined loans which provide the necessary funds to purchase a property and though at the beginning they may seem more expensive due to higher initial monthly payments, in the long run they will make you save a lot of money due to the lack of Private Insurance Mortgage Payments that they imply.

First: A Few Concepts

80/20 Mortgage loans are actually two different loans combined into a single financial product. In order to understand how this work, you need to have an idea about several loan concepts including: Mortgage Loan, Home Equity Loan, Private Mortgage Insurance, Down Payment, Collateral, etc.

It is not the purpose of this article to explain all the above concepts thoroughly, but we will give a clear idea of them so you can understand how 80/20 mortgage loans work and how you can take advantage of these loans in order to avoid having to pay the private mortgage insurance premium monthly payments and thus save thousands of dollars.

With a mortgage loan, the real estate property guarantees the repayment of the loan. In the event of default, the lender has the legal right to repossess the property and force its sell in order to claim his money. Home equity loans or second mortgages use the same property as collateral too. But they only use the remaining value of the property that exceeds the amount of debt that is being secured on the mortgage loan. This amount is known as equity.

When a mortgage loan finances more than 80% of the purchase or market value of a property, an insurance is required in order to obtain approval. This insurance is called private mortgage insurance and is meant to protect the lender in the event of the borrower defaulting on the loan. The premium of these insurances is rather high and it is included in the monthly payments of the loan that are paid by the borrower.

80/20 Mortgage Loans: The Solution

The only way of avoiding payment of Private Mortgage Insurance is to put money down when purchasing the property. This implies requesting less than 80% of the property’s value. Thus, a down payment of at least 20% of the property’s value can free you from having to face the private mortgage insurance expensive payments every month.

80/20 Mortgage loans come to solve this problem. These loans are actually a combination of financial products and not a single loan. You get a mortgage loan with an amount equivalent to 80% of the property’s value, and a home equity loan that covers for the rest of the money needed to purchase the property. With this procedure, you get all the money you need in order to buy the asset without having to pay for the private insurance mortgage premium.