Using a Second Mortgage for an 80-20 No Money Down Home Purchase Loan
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Unlocking Homeownership: The 80-20 No Money Down Loan Strategy
Overview
For many aspiring homeowners, the barrier to entry is the down payment. If you’re paying as much for rent as a potential mortgage, an 80-20 no money down loan might be your gateway to homeownership. This financing structure involves an 80% first mortgage and a 20% second mortgage, allowing buyers to skip the down payment or preserve their savings.
Understanding the 80-20 Loan
Commonly known as piggyback loans, these mortgage arrangements split the total loan amount into two parts. The primary loan covers 80% of the home’s cost, while the second mortgage takes care of the remaining 20%. Typically, the second mortgage comes with a higher interest rate, as lenders compensate for lending smaller amounts by charging more.
Options for the Second Mortgage
1. Separate Lender: Often, the secondary mortgage is taken from a different lender, which may offer a slightly higher interest rate due to the smaller loan size.
2. Same Institution: In some cases, the same financial institution provides both loans, potentially establishing a home equity line of credit. This can simplify the process.
3. Seller Financing: Another alternative is borrowing directly from the seller, known as a purchase money loan.
Weighing the Pros and Cons
While an 80-20 loan cuts out the down payment, it may result in higher interest rates and require private mortgage insurance. Homebuyers face larger monthly payments and the risk associated with being heavily leveraged. However, in high-cost housing markets, it can be a feasible path to ownership.
According to Doug Duncan from the Mortgage Bankers Association, banks often extend special mortgages to low- and moderate-income groups under the Community Reinvestment Act. Yet, obtaining no- or low-down-payment options for larger, jumbo loans can be challenging.
Potential Cost Offsets
In some regions, like California, mortgage insurance is mandated for loans exceeding an 80% loan-to-value ratio. However, 80-20 loans often bypass this requirement, potentially lowering monthly payments. For those seeking lower payments, the T.A.M.I. program offers a viable alternative. It includes lender-based mortgage insurance, which can be tax-deductible, providing financial flexibility for homeowners to access home equity for improvements or emergencies.
Conclusion
The 80-20 no money down loan can be a powerful tool for transitioning from renting to homeownership, especially for young professionals with good credit but limited savings. While it presents some challenges, the benefits in certain markets make it a compelling option worth considering.
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