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Using a Second Mortgage for an 80-20 No Money Down Home Purchase Loan

Many renters want to own their own home, but they simply don’t have the down payment to make the purchase. If you’re able to afford a house payment as much as your monthly rent, an 80-20 no money down loan could get you out of the rent trap. (80% first mortgage - 20% second mortgage) "It allows people to buy without a down payment, or for those people who would prefer not to touch their savings to get into a house," says mortgage expert. "What we're seeing is a lot of young professionals," he adds. "People who have gotten out of college and have good jobs. They have good credit, but they haven't had the opportunity to accumulate a lot of savings."

The 80-20 loans are also known as piggyback loans. The buyer takes out a loan for 80% of the cost of the home. Then takes out a second mortgage for 20% of the loan to use as a down payment. The homebuyer has three options for the 20% part of the loan. Most often the 20% loan is secured from a separate lender, but look up for the second loan to have a higher interest rate.

MortgageDaily.Com shows “The second lender-the one who is only financing 5% to 20% of the loan-doesn't see much benefit from lending the money unless he can actualize a high interest return. If the buyer borrows from the same financial institution, they could open a home equity line of credit and withdraw two separate amounts; one amount for 80% of the loan and 20% for the “down payment”.

The third option is to borrow the 20% part of the loan directly from the seller, also known as a purchase money loan. Kipplinger.com shows there is a down-side to the 80-20 loan. “You likely will have to pay a higher interest rate, buy private mortgage insurance (borrowers usually pay 20% of a home's value to avoid this) and make bigger monthly mortgage payments. Plus, it can be dangerous to be so highly leveraged. But in an expensive housing market, it can be the only way to afford a home.”
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 provide a certain share of business to these economic groups. But no- and low-down options for jumbo loans (higher than $300,700) are harder to find.”

The costs of the higher interest rate from the 80-20 mortgage are sometimes off-set because there is no mortgage insurance built into the loan. The State of California only requires mortgage insurance for all home loans exceeding 80% loan to value or LTV. An 80-20 loan allows the home-owner to step aside the insurance requirement, thus having a lower monthly payment.
If your goal of an 80-20 loan is to have a lower monthly mortgage payment, another option is the T.A.M.I. program. The T.A.M.I. program includes mortgage insurance where as the 80-20 program doesn’t require mortgage insurance. Robin M. Root; a senior level loan officer says the T.A.M.I. provides lender-based mortgage insurance in exchange for a slightly higher interest rate. Since the IRS, allows a deduction for all interest paid for home loans, the cost of the mortgage insurance is tax deductible. And, unlike the 80-20 loan program, when the buyer has equity built up, the homeowner has the flexibility to open a home-equity loan for home improvements or cash emergencies.


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