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80-10-10 Loan: When Two Mortgages Can Save You Money

If you buy a home with an 80-10-10 loan, you can avoid private mortgage insurance or sidestep strict lending standards. It entails getting two mortgages.
Finding the Right Mortgage, Mortgages
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An 80-10-10 loan lets you buy a home using two mortgages. People get 80-10-10 mortgages mainly to avoid paying private mortgage insurance, sidestep the strict lending requirements of jumbo loans, or to buy and sell a home at the same time.

What is an 80-10-10 loan?

An 80-10-10 loan is structured as two mortgages with a down payment. The first number always represents the primary mortgage, the middle number represents the secondary loan, and the third number represents the down payment:

  • A primary mortgage for 80% of the home’s price
  • A secondary mortgage for 10% of the home’s price
  • A down payment of 10%

Pronounced “eighty ten ten,” a few lenders refer to it as a “combination loan.” It was called a “piggyback loan” during the housing bubble in the early 2000s, but that terminology isn’t used as often now.

The first number always represents the primary mortgage, the middle number represents the secondary loan, and the third number represents the down payment.

The combination of 80-10-10 is the most common, but other blends of numbers are possible. For example, people sometimes get 75-15-10 loans to buy condominiums because they can get lower mortgage rates by borrowing a maximum of 75% of the condo’s value.

Why get an 80-10-10 loan?

People get 80-10-10 mortgages for various reasons:

  • To avoid paying for private mortgage insurance, or PMI
  • To get around strict lending standards for jumbo mortgages
  • To afford to buy a home before selling the current home

How to get an 80-10-10 loan

Getting an 80-10-10 mortgage requires applying for two separate loans: the primary mortgage and the second mortgage. If you’re required to get the loans from separate lenders, the loan officer for the primary mortgage can offer referrals for the second-mortgage lender.

Applying for two loans may mean gathering two sets of financial documents, filing two applications and going through two closings.

80-10-10 loans avoid mortgage insurance

Lenders require private mortgage insurance when the conforming loan is for more than 80% of the home’s value. (Here’s a full explanation of PMI.) An 80-10-10 loan takes advantage of a loophole in the mortgage lending rules because the primary mortgage is for 80% (or less) of the home’s price. The combination of the borrower’s 10% down payment and the second mortgage for the other 10% allows the borrower to avoid mortgage insurance.

For people with very good credit, an 80-10-10 can cost less than a loan with mortgage insurance.

The second mortgage in an 80-10-10 loan is usually a home equity line of credit, or HELOC. (See what they are and how to qualify.) For people with credit scores of 740 or higher, 80-10-10 loans often cost less than traditional loans with mortgage insurance during the first 10 years while the HELOC is interest-only. The 80-10-10 advantage narrows for people with lower credit scores because of the higher interest rates they are charged.

80-10-10 loans replace jumbo mortgages

Some buyers of expensive homes choose 80-10-10 mortgages to get around the stricter lending requirements for jumbo mortgages. (See this brief explanation of what makes a loan a jumbo.) Jumbo loans require bigger down payments, higher credit scores and more cash reserves than conforming mortgages do, says Henry Brandt, branch manager for Planet Home Lending in Irving, Texas.

Here are two strategies to get around the tighter requirements for jumbo loans, Brandt says:

1. Reduce the loan amount below the conforming limit. A borrower can use an 80-10-10 to get a conforming loan, which has looser lending standards, instead of a jumbo mortgage. Take the hypothetical case of someone who buys a $550,000 home in a market where the conforming limit is $453,100. The buyer has enough for a 10% down payment, but not enough for a 20% down payment.

In this case, the borrower could make a $55,000 down payment, get a $55,000 HELOC, and take out a mortgage for $440,000, which is a conforming loan.

2. Get more favorable terms with 20% down. Lenders charge higher interest rates for jumbos when the borrower puts less than 20% down, Brandt says.

Someone buying a million-dollar home might not have $200,000 for a down payment, but might have $100,000, Brandt says. Such a borrower can get an 80-10-10 loan and snag a better interest rate on the primary mortgage. Some borrowers can even qualify for 80-15-5 mortgages if they have “only” $50,000 for a down payment on a million-dollar home.

Pros of 80-10-10 loans

  • Allow conforming borrowers to avoid mortgage insurance
  • Borrowers can avoid jumbo loans, which have stricter requirements
  • Jumbo borrowers get a better mortgage rate by using the second mortgage as a supplement to the down payment

Cons of 80-10-10 loans

  • The borrower has to qualify for, apply for and close on two loans instead of one
  • Refinancing the primary mortgage later might be tricky because it requires the consent of the second-mortgage lender
  • Homeowners build equity more slowly when making the minimum, interest-only payments on the HELOC during the initial draw period (usually 10 years)
  • Interest rates on HELOCs are variable, so they can go up

History of piggyback loans

During the housing boom at the beginning of the 21st century, lenders pitched piggyback loans as a way to buy a home with no money down. Typically, the home buyer got a primary mortgage for 80% of the home’s price and a HELOC for 20% of the home’s price. This structure allowed home buyers to put zero percent down while avoiding mortgage insurance.

These no-money-down piggyback loans contributed to an upward spiraling of home prices. And because these homeowners had risked little of their own money when buying their homes, they readily relinquished their homes to foreclosure when values began to fall. No-money-down piggyback mortgages were one of many contributors to the real estate bust and the Great Recession.

Having learned the lesson that borrowers were less likely to walk away from homes if they had put their own money down, lenders now require down payments for most borrowers, including the frequently required 10% down payment for 80-10-10 loans.

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