How Do 80-10-10 Loans Work?
Coming up with a down payment for a home can be daunting, but you have options to bridge the gap in your savings. With an 80-10-10 loan, you take out a primary mortgage for 80% of your purchase price and a second mortgage for another 10%, while making a 10% down payment. The result: You get into the home you love without having to pay extra for private mortgage insurance (PMI).
- What is an 80-10-10 loan?
- 80-10-10 loans vs. traditional mortgages
- Pros and cons of an 80-10-10 mortgage
- Who qualifies for an 80-10-10 mortgage?
- 3 reasons to get an 80-10-10 mortgage
- 3 reasons you might choose not to get an 80-10-10 mortgage
- Alternatives to an 80-10-10 loan
What is an 80-10-10 loan?
An 80-10-10 loan is two mortgages combined into one package that can help borrowers save money and avoid paying PMI. Borrowers are typically required to pay PMI when they make a down payment of less than 20%, increasing their monthly home loan payments.
To avoid paying PMI, some borrowers use 80-10-10 loans — also known as piggyback mortgages or combination loans. Breaking it down:
- The first loan is a traditional mortgage that covers 80% of the home’s cost.
- The second is a home equity line of credit (HELOC) or home equity loan that covers another 10% of the cost, effectively serving as half the down payment. In short, the second mortgage piggybacks on the first.
- Borrowers pay the remaining 10% as a cash down payment.
Over the life of the loan, you’ll make two monthly payments — one on the first mortgage and the other on the second mortgage.
How 80-10-10 loans are structured
The first loan is typically a fixed-rate mortgage, while the second piggyback loan is often a variable-rate home equity product like a HELOC. However, some lenders instead offer home equity loans with fixed interest rates. The piggyback loan generally will have a higher interest rate than your first mortgage.
Borrowers will sometimes opt for an adjustable-rate mortgage (ARM) for the first loan, said Erik Marquez, a branch manager for Moreno Valley, Calif.-based Summit Funding. That means the borrower would pay a fixed rate for a certain period up to 10 years. After, the lender could adjust the rate on a predetermined schedule. The adjustment could increase your monthly mortgage payments, making them unaffordable. It may be best to avoid an ARM unless you plan to sell or refinance your mortgage during the fixed-rate period.
When it comes to getting a second mortgage, you may be able to choose between:
- Home equity loans, which typically offer fixed interest rates and predictable payments
- HELOCs, which usually have variable rates and more flexibility
HELOCs have a draw period — when you can withdraw money up to a limit — and a repayment period — when you repay the money you withdrew. You might be able to make interest-only payments during your HELOC draw period, which is usually 10 years, but your payments could rise significantly during your repayment period.
80-10-10 loans vs. traditional mortgages
With an 80-10-10 loan, you’re taking out two loans: One to cover 80% of the purchase price and another to cover 10%.
With a traditional mortgage, you’re taking out one loan to pay the balance of the purchase price after your down payment. If you make a 10% down payment, your home loan will be 90% of the purchase price, but you’ll also owe PMI.
An 80-10-10 mortgage means dealing with two sets of origination fees and closing costs. It also means making two monthly payments instead of one. This could work in your favor, though, depending on the mortgage you choose and your financial priorities. Let’s look at how it breaks down if you choose a 15-year home equity loan as your second mortgage.
Pros and cons of an 80-10-10 mortgage
No private mortgage insurance. Often, the No. 1 reason to use a piggyback mortgage is to avoid PMI, which could cost you about $30 to $70 a month for each $100,000 you borrow. Your PMI cost will be calculated based on additional factors such as loan type, loan length and credit score.
Less money down. A lower down payment means you may be able to purchase a home sooner. And that could mean having more cash on hand for moving expenses, home furnishings and other upfront property-related costs.
Tax benefits. You can deduct the mortgage interest you pay on up to $750,000 of qualifying home loans (or on up to $375,000 if married but filing separately) if you itemize. Qualifying loans can include second mortgages.
More debt. A 20% down payment gets you that much closer to owning your home outright. Opting for a 80-10-10 mortgage means you’re signing on for more debt. The longer your repayment timeline and the more money you owe, the greater the risk that you’ll run into repayment challenges.
Variable interest rates. If the second loan is a variable-rate product, you may find yourself paying more if interest rates rise.
Tax benefits may be better with PMI. PMI can be tax deductible based on income standards. You may not be able to deduct your full PMI payments if your adjusted gross income is more than $100,000 ($50,000 if married but filing separately). You can’t deduct PMI at all if your AGI is more than $109,000 ($54,500 if married but filing separately).
Who qualifies for an 80-10-10 mortgage?
Qualifying for an 80-10-10 mortgage is more complicated than a traditional mortgage because you’re qualifying for two loans instead of just one. One of the most important factors is your credit score. The minimum credit score for a conventional mortgage is 620.
The minimum credit score for your second mortgage depends on which home equity product is being used:
- Home equity loans: Borrowers need a credit score of at least 620, but some lenders have higher minimums of 660 or 680. To get the best rates, borrowers need a score of 740 or higher.
- HELOCs: Almost half of all HELOCs originated in 2019 went to borrowers with credit scores of 780 or higher, according to Equifax’s Quarterly U.S. Consumer Credit Trends report. More than 60% went to borrowers with credit scores of 740 or higher.
For both loans, lenders will also look at your debt-to-income (DTI) ratio, which is your total monthly debt payments divided by your gross monthly income. In general, lenders look for a DTI of 43% or less. But some lenders can work with a higher DTI, especially if you can prove you have the ability to repay the loan.
Lenders will also consider your income and employment. They’re looking for steady, consistent employment over the past two years. If you’re self-employed or have seasonal or variable income, you may need to provide additional documentation.
How to get a second mortgage
80-10-10 mortgages were common during the mortgage boom in the early 2000s, according to the Consumer Financial Protection Bureau (CFPB). They are still available today, but finding second mortgage lenders may be more challenging. You have two options for your 80-10-10 loan:
- Find a lender that will offer both mortgages. This means the lender provides your primary mortgage for 80% of the purchase price and the second mortgage for 10%. You only have to deal with one lender and one application. You’ll still have to pay two sets of closing costs. Look for lenders that advertise combination or piggyback mortgages.
- Use two different lenders. One would finance your primary mortgage, while the other would handle your second mortgage. This requires more coordination on your part, and you’ll have to complete two mortgage applications.
3 reasons to get an 80-10-10 mortgage
You can save money by not paying PMI. If you’ve determined your monthly PMI payment is likely to be steep, an 80-10-10 mortgage can get you the keys to the house without those costs. You’ll want to understand the full scope of your commitment to make sure getting a second mortgage to avoid PMI is more cost-effective than paying PMI.
You want to buy in a high-cost market. Conforming conventional mortgages are only available up to a certain dollar amount, which in most areas is $510,400 in 2020. Some areas with higher home prices have higher conforming loan limits up to $765,600. An 80-10-10 loan can be a useful tool in places where those loan limits fall short of home prices.
Typically, borrowers who want to buy properties with values above conforming loan limits must take out jumbo loans, which may require a 20% or 25% down payment to get the lowest rates. The 80-10-10 option helps borrowers stay below the conforming loan limit on their primary mortgage and avoid PMI at the same time.
You want to hold on to your cash. For some borrowers, 80-10-10 loans can be an attractive option even if they can afford to put down 20% but want to have more cash on hand. At the start, they avoid making a larger down payment, conserving cash. Then they might strategically pay down or spend more on the HELOC or home equity loan as needed.
3 reasons you might choose not to get an 80-10-10 mortgage
You want to avoid high-interest payments on the second loan. HELOCs typically have a variable rate. If interest rates are rising, this may spook you out of looking at 80-10-10 products. If it doesn’t, consider making larger monthly payments even if you’re in an interest-only period. Paying down that second loan will directly impact your long-term monthly expenses.
You’re worried about not being able to refinance or sell in the future. Refinancing can be more difficult if you have loans with two lenders, especially if you’re struggling with repayments or if your home drops in value. Work with lenders that offer both parts of an 80-10-10 loan so that you’re only working with one company. But even then, it’s worth asking about future refinancing options and potential obstacles before you sign for the loans.
Selling in the future could also be a challenge given that it can be difficult to predict how the real estate market will perform in the future.
Your long-term costs don’t outweigh the benefits. A piggyback loan won’t always save you money, even if you’re not paying PMI. It depends on the first and second mortgage interest rates. You’ll also need to pay closing costs on both loans. Ask your lender for estimates of what you’ll pay on a single mortgage with PMI versus what you’ll pay with an 80-10-10 loan so you can compare the two.
Alternatives to an 80-10-10 loan
If you decide against an 80-10-10 loan but are still unable to save for a 20% down payment, you have options.
First, you can simply pay mortgage insurance. Federal Housing Administration (FHA) loans let you put down as little as 3.5% but include a mortgage insurance premium that you’ll pay monthly until your mortgage is paid off.
You can put as little as 3% down on some conventional mortgages, but you’ll pay PMI. But once you reach 20% equity, you can ask your lender to remove your PMI. Your lender automatically terminates PMI when you reach 22% equity.
If you’re set on avoiding PMI, here are some other choices:
- Buy a less expensive property. This can help make it affordable for you to make a large enough down payment to avoid PMI.
- Find homeownership assistance programs for first-time buyers. Many local, state and national organizations offer homebuyer support. Program requirements may vary, but there will typically be criteria around minimum credit scores.