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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.

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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 HomeLoanCenter.com.

"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."

Getting 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 home's price.

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.

 
 
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