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80-20 mortgages: No money down without PMI

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Second loan, higher rate
Except in unusual cases, the interest rate on the piggyback loan is higher than the rate on the first mortgage. But the combined payment usually costs less than a loan of greater than 80 percent of the home's value, plus mortgage insurance. This is especially true if the homeowner itemizes deductions on federal income tax, because mortgage interest is deductible but mortgage insurance is not.

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"It pretty much comes out to a straightforward mathematical evaluation," says Bob Walters, divisional vice president of Quicken Loans. You merely compare the cost of an 80-20 piggyback loan with a loan that includes mortgage insurance. The piggyback loan usually costs less each month.

Lenders structure 80-20 loans in many ways. At Hsieh's HomeLoanCenter, the first mortgage generally is a 5/1 ARM -- a loan with a fixed rate for the first five years, and which adjusts annually after that. The piggyback loan is a home equity line of credit that changes with the prime rate. These loans, Hsieh says, are designed to be refinanced in three to five years.

With Countrywide Home Loans, the 20-percent piggyback is always an equity line of credit pegged to the prime rate, and the 80 percent first mortgage can be a fixed-rate, adjustable-rate or interest-only loan.

Pros and cons
The 80-20 loans have their pros and cons, says Vijay Lala, senior vice president of product development at Countrywide. "The pros are that you can get into a home with almost no money down," he says. "You just have to have your closing costs, and you can get your payment as low as possible with the interest-only feature."

The main drawback is a biggie. If the house loses value -- a possibility in overheated markets where these loans might be especially tempting -- the owner ends up owing more than the house is worth. That becomes a problem if the owner needs to sell the house or wants to refinance the loan. In such a case, the owner has to come up with cash to repay the loan in full.

An 80-20 loan isn't just for the cash-strapped borrower. Some home buyers have ample down-payment money, but the money is invested and they don't want to liquidate it.

"For relatively wealthy people, it's a cheap way of borrowing money at these low interest rates," says Diane Saatchi, who deals with plenty of wealthy clients as regional vice president of the Corcoran Group in the East Hampton, N.Y.

Bankrate.com's corrections policy-- Updated: Mar. 28, 2005
 
 
More stories by Holden Lewis
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