What do you know about 80 by 20 loans

Saturday, February 23, 2013

What do you know about 80 by 20 loans

An 80/20 loan is also known as a piggyback mortgage; it eliminates the usual requirement of a down payment on a home, yet can still give you a classic fixed-rate mortgage. It's a pair of two loans, but it's called an 80/20 loan when grouped together.

80/20 Loans What Are they and who Are They for

The first mortgage is taken for 80% of the cost of the home (with a lower interest rate) while the second is taken for 20% of the cost of the home (with a much higher interest rate). The reason for a mortgage is that a typical down payment is 20% of the price of the home, and the investor may not have the money or may not want to do this kind of down payment at the time of the purchase but still wants to avoid paying mortgage insurance.

Why Would You Take An 80/20 Loan?

As I mentioned earlier, an 80/20 loan splits the cost of your house in two non-equivalent chunks. The 80% chunk represents what a conventional mortgage would be taken for, the price of the home minus the 20% that would be already put down. In a situation where you do not have the money for a down payment, you would consider applying for an 80/20 loan. If you qualify, the other 20% of the cost of the home would be taken as a secondary loan. You would require payments on both of these loans simultaneously until they’re paid off. Since the 20% loan will have a higher interest rate than the 80% loan does, it should be your payment preference.

Thanks to the creative financing, this is a traditional mortgage loan without a down payment. Normally if, you can't put down at least 20% you would have to spend some sort of mortgage insurance premium each month along with your payments. Taking an 80/20 loan also protects you from having to pay mortgage insurance in the same way that a 20% down payment does.

Who Can Get An 80/20 Loan?

An 80/20 loan requires a higher credit score than your regular mortgage. This is because an 80/20 loan possesses a greater risk to the lender than a normal 80% mortgage does. Monthly payments are for two loans instead of one, and you need to be trusted to pay them off in a timely manner. If you had a history of being late on bill payments or do have a lot of debt, you can't often expect to qualify for one of these loans.

If you have good credit, know you can hold two loan payments but just simply don't have the money to put down 20% on a down payment, you should consider an 80/20 loan. Lenders want to see a stable employment history, a high credit score, and a low debt-to-income ratio, meaning that you get more money than you owe.

Rates for 80/20 loans are usually fixed, but sometimes lenders will offer varying options. Be sure you know what you are getting yourself. The last thing you want is to be in a situation where you are living in a place that is 100% financed, and the monthly payments happen to be too much to handle.

Only get an 80/20 loan if you're confident, you can fit it into your budget and actually afford the house. If it's the right choice for you, an 80/20 loan allows you to pull the trigger on a home that you can't put a down payment on right now, but can surely afford on a monthly basis.

About the author-

Hugh Tyzack is the founder of GBP Loans Limited, which specialises in no fee loans for people with bad credit. Follow Hugh on Twitter @GBPLoans and also on Google+

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