The 30-Year Mortgage You've Never Heard Of
If you want to buy a home, chances are you need a mortgage. You probably already knew that. The most common type of mortgage is one with a 30-year term with a fixed interest rate (aka 30-year fixed). You probably already knew that, too.
What you might not know is the variety of ways this common product can be structured, so you have the option of getting a loan that suits your financial situation. A structure that was common before the housing crisis and has since re-emerged is the 80/10/10, also called a "piggyback mortgage," which allows homeowners to save money while making a lower down payment. Piggyback mortgages fell out of favor after the housing bubble burst, because they're riskier for lenders, but they're making a bit of a comeback and may be something you want to ask about if you're considering getting a home loan.
What is an 80/10/10?
The traditional way to do the 30-year fixed-rate mortgage is to make a 20% down payment, which allows you to borrow 80% of the home's value without having to take out private mortgage insurance. PMI protects the lender from loss if the borrower defaults on the loan, but it's a cost the homeowner never recoups. It also drives up the cost of mortgage payments, which is why many consumers want to avoid it, but most lenders won't make a loan for more than 80% of a home's value without it. (If you're wondering what monthly mortgage payment you can afford, this calculator can help.)
That's where the 80/10/10 mortgage comes in. The "80" is for the 80% of the home's value covered by the first mortgage, the "10" represents a 10% down payment from the buyer, and the other "10" is a second loan to cover the 10% the buyer couldn't put down. The second lender takes on the risk of the loan, allowing the buyer to avoid PMI while protecting the lender of the larger loan. It's essentially an alternative to getting a loan for 90% of the home's value with a 10% down payment and having to pay PMI.
"It's generally the kind of financing that exists in more robust markets, and it's generally not the kind of financing you would [have found] in 2010 or 2008," said Tony Sachs, chief lending officer at Sindeo, an online mortgage marketplace. "Primarily the risk associated with that second loan is truly based on home values at least holding steady or increasing, but if home values decrease and you're in that second position, your lien may be the first lien that's wiped out by the elimination of equity."
The interest rates on the borrowed 10% are adjustable and currently range from 4.75% to 5.5%, according to Sindeo. Like interest on the main mortgage, interest on the 10% loan is generally tax-deductible.
How do I get an 80/10/10?
If you have only enough for a 10% down payment, it's worth asking potential lenders about the availability of an 80/10/10, though it depends on the housing market in your area (and the lender's preferences) whether or not it will be an option. You'll probably deal with one lender, but because you have two different loans, it's possible you would have to manage payments to separate mortgage servicers.
"Oftentimes, in fact, most of the time, one lender facilitates the entire transaction but sells either both loans to other institutions in the secondary market or may keep … the first loan and sell the second loan to simply facilitate the origination of the second loan," Sachs said.
You don't have to go searching for that second lender on your own, but make sure you understand exactly how the structure will affect how you make monthly payments. Loan payment history is the most important thing in determining your credit standing, and you can see how things like a mortgage affect it by getting a free credit report summary every 30 days on Credit.com.
There are many ways to get a home loan beyond the 30-year fixed-rate loan or making the "standard" 20% down payment -- your choice depends on the home you choose, the market it's in, your lender's offerings, and your financial situation, so take time to research your options.
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This article was written by Christine DiGangi and originally published on Credit.com.
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