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What is an 80/10/10 loan?
An 80/10/10 loan is a mortgage product that combines a first mortgage, a home equity loan (also referred to as a second mortgage), and a down payment. The first mortgage equals 80 percent of the home’s loan-to-value ratio, while the home equity loan and cash down payment both equal 10 percent of the home’s purchase price.
Also known as piggyback loans, 80/10/10 loans are popular with homebuyers who want to avoid paying private mortgage insurance. Homebuyers who dislike the regulations required by jumbo mortgages may also opt for an 80/10/10 loan to keep their first mortgage limited to 80 percent of the home’s value. This loan type remains popular with borrowers who have enough cash to cover a 10 percent down payment.
The interest rate for the first mortgage in an 80/10/10 loan is comparable with market interest rates. However, home equity loans nearly always have interest rates that are higher than first mortgages, even for well-qualified borrowers. Prospective home borrowers have to run the numbers to see if taking out an 80/10/10 loan or paying private mortgage insurance is better for their situation.
Even though the interest rate for the home equity loan is higher than that of the first mortgage, some homebuyers prefer the 80/10/10 loan because the second mortgage payment partly goes toward paying off their home. You can even make additional payments to the home equity loan to accelerate the payoff date, usually without penalty. Private mortgage insurance payments are fees that do not reduce the balance of the home.
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80/10/10 loan example
Betty found her dream home on Long Island, and reached a deal to purchase the home for $300,000. Her first mortgage was for $240,000, or 80 percent of the $300,000 price, at an interest rate of 5 percent. The down payment of 10 percent equalled $30,000, while the home equity loan or second mortgage — also equal to 10 percent of the value of the home — was $30,000, at an interest rate of 7 percent. Because the first mortgage has a loan-to-value of 80 percent, Betty avoided paying private mortgage insurance.