80-20 mortgages: No money down without PMI
As home prices
continue to climb, borrowers increasingly turn to 100-percent financing, and especially
home loans that sidestep the need for mortgage insurance.
One such loan is known as the 80-20 mortgage. The
home buyer takes out two loans -- the first for 80 percent of the purchase price,
and the second for 20 percent of the home's price. The borrower is expected to
come up with the closing costs.
"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 Anthony Hsieh, CEO and founder of
"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."
off the rent treadmill
These mortgages are targeted at people who
feel stuck on the rent treadmill. They can afford monthly rent that costs roughly
the same as a house payment, but after they pay their monthly bills, they can't
save much money toward that down payment. Many of these people watch home prices
rising faster than their incomes and feel that they're falling further behind
with each month that they rent.
Plenty of mortgage programs
allow borrowers to buy houses with little or no money down, but they usually require
private mortgage insurance, or PMI. Mortgage insurance protects the lender from
the costs of foreclosing on a house when the borrower falls too far behind on
the loan payments. The lender benefits, but the borrower pays. Generally, mortgage
insurance is required when the loan amount is for more than 80 percent of the
The way to avoid paying mortgage insurance is
by getting a "piggyback loan" -- a second mortgage to back up the first
mortgage. The first and main mortgage is for 80 percent of the home's price. The
piggyback loan is for 20 percent of the home's price, minus the down payment,
if any. If you see mention of an 80-15-5 loan, it means that the borrower got
a main mortgage of 80 percent of a home's purchase price, a piggyback loan for
15 percent, and made a 5-percent down payment. Myriad combinations, such as 80-10-10,
are possible. The 80-20 uses a piggyback loan without a down payment.