80 20 Equity Loans What You Need To Know

Published: 11th September 2009
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Selecting An 80 20 Home Loan

This is when a borrower takes out a normal mortgage for 80% of the house cost and has a second loan for the outstanding 20%. It also called a "piggy back" loan.

So, it can be seen the process is a combination of 2 completely separate loans to come to a total of 100% for the cost of the house being purchased. Both mortgages will have different rates of interest and it is not uncommon to even have different lenders or brokers.

Prevailing financial conditions seriously affect 80 20 loans.

It is presently all but impossible to have an 80 20 loan as a result of the present depressed economy. Having said they are not available, it is not an option available to Mr and Mrs Average!

An 80 20 home loan option is at the whim of the economy. With a robust economy and real estate prices on the rise, this is the time that lenders tend to make 80 20 loans available. There is no reason for an 80 20 loan option when people have no money and the financial atmosphere lacks resilience.

Some purchasers favor the 80 20 home loan as they do not have the money available for a down payment on a house and this type of loan can also save them the cost of PMI.

It is not always the case that people choose an 80 20 home loan because they are having difficulty finding the deposit for a traditional mortgage. Some have their eye on other investments and feel they may do better putting their funds elsewhere and going for 100% house financing.

There will always be more interest on an 80 20 loan.

People will undoubtedly pay higher interest charges when funding a home with an 80 20 loan option. The entire loan is generally looked at by lenders as being one of increased risk and the second part of the loan can have a less favorable rate of interest because the lender is not in prime position to recover the loan if a default situation occurs.

Interest is payable on two independent home loans and as mentioned the 20% will carry stiffer rates than the first. For this reason an 80 20 loan will more than likely work out more expensive than a normal mortgage but sometimes this is not the case as we show later on. For many home buyers a monthly payment is approximately equivalent to 28% of their gross income. People should understand that having a second loan can exceed this level and make the payments unmanageable.

80 20 Loan Equity Issues

Traditionally the person buying a house pays a 10%, or greater, down payment which allocates a 10% equity to the buyer. With an 80 20 Loan the buyer has no initial equity at all. Equity in the house is slowly increased only by paying off the principal on the 2 loans and as the initial interest rates are quite high this can take some time. Also consider that any downturn in the house market can bring about a negative equity situation which means that possible refinancing under more favorable terms will not be possible.

3 Benefits For An 80 20 Loan

* 100% financing which means there is no down payment required on the house.

* Private Mortgage Insurance can be avoided. PMI is all about giving the lender protection against the buyer defaulting on the home loan payments. Lenders generally insist on PMI if a house buyer is funding 20% or less. Using an 80 20 loan to split the mortgage negates the requirement for PMI which can save a substantial amount of money every month. It can be seen how much can be saved by not paying PMI when you consider that it can be as much as 2.25% of the loan.

* Low Cost Interest On First Mortgage. It is quite possible that the interest on the first mortgage may be less than if someone had taken out a traditional 100% mortgage. It is a certainty that the interest rate on the second mortgage or 20% loan is going to be more, but it is worth considering that this part of the loan, being for a smaller amount, should be paid of relatively quickly. Once this is paid off the existing rate should be up to 2.5% lower than for a traditional mortgage.

Be Aware Of The Following With An 80 20 Loan

* As each loan requires a closing cost there are, obviously, 2 closing costs to be settled. It is usually the case that the 80 20 incurs higher total closing costs.
* There can also be a substantial loss if your home loses value. If the financing is at 100% the chances are slim that the property can be sold as there are not sufficient funds available to pay off the loan.
* In general, anybody applying for an 80 20 loan when they are available would have to be a good credit risk.

80 20 Equity Loans What You Need To Know

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