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80/20 loans are good for borrowers with little savings. Many conventional loan products require a 20 percent down payment and that can add up. For borrowers with little savings, an 80/20 loan offers a loan option that helps a borrower buy a home. An 80/20 loan allows a borrower to take out two loans. The first loan is the primary loan for the mortgage. The second, or piggyback loan, secures the 20 percent down payment requirement.
There are programs available to borrowers with 10 percent down payment options, or sometimes less like 5 percent or 3.5 percent. But, all programs that require less than 20 percent require mortgage insurance. Mortgage insurance can be costly and can increase a borrower’s monthly payment significantly.
With an 80/20 loan, a borrower secures the 20 percent needed for the down payment. If a borrower were unable to put at least 20 percent down toward the purchase of the home, they would be required to take out PMI, or private mortgage insurance. PMI protects the interests of the lender in the event that the borrower defaults on the loan. For conventional loan products, PMI is removed once the value of the home has reached a loan-to-value ratio (LTV) that falls below 80 percent.
No Down Payment
A borrower of an 80/20 loan would not need a down payment. The piggyback loan secures the required down payment meaning that the borrower does not need down payment expenses. The borrower will be responsible for paying for closing costs, however, and that can be expensive and add up to 3 to 4 percent of the loan amount.
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