Do the Piggyback: The Skinny on 80-20 Financing


People who want to take on a home loan but do not have enough savings or simply do not want to liquidate their current assets usually turn to 100 per cent financing programs to make this happen. The interest is particularly high on loans that scrap the tedious requirement of mortgage insurance. One such loan is the 80-20 financing program.

Under the 80-20 deal, the borrower obtains two loans to get a house: the first amount being 80 per cent of the homes actual value and the second, 20 per cent. This scheme is ideal for young professionals with considerable income but have no savings. They have long been living on a rented house thats priced similar to a mortgage payment but do not have enough cash on hand for a down payment. The 80-20 loan eliminates having to pay for a PMI, or a private mortgage insurance, which is usually placed upon loans that are more than 80% of the houses actual price. Lenders use the private mortgage insurance to protect themselves in the event that the borrower defaults on his loan payments.

Thus, for those who do not want this burden, take on piggyback or combination loans, like the 80-20 loan. Sometimes, this can be altered into an 80-15-5 loan, where the first is 80% of the homes value, the second is 20% of the value and the third is the down payment based on the same value. The variations depend on the deal the borrower closes with lender. It would better if you talk to a loan expert to determine the financing program that suits you best.

Usually, the loan that piggybacks comes with a higher interest rate than the first one. But do not despair just yet. This is because when you compare the monthly payments you make through the combination loan with the traditional 100% home loan, the amount you pay with the former actually turns out lower. Why? The 100% loan, as said earlier, carries the weight of the private mortgage insurance.

To reiterate, the advantage of assuming a piggyback loan like the 80-20 loan is that you do not need to pay a down payment and you dont have to worry about the PMI. However, as with anything else in this world, this does not go without a risk. Home values rise and fall through the years and, hypothetically, if your home loses its value in the future, you may be left owing more than what your house is worth. Worst case scenario, you might have to declare bankruptcy if you cannot sell the house with the original price tag and you fail to pay the loan amount in full.

Therefore, like any financing scheme you plan on entering, know your financial capabilities first and assess whether you are willing to face the risks if and when they come. An 80-20 loan is already ideal and will cost you a lot less; but when handled irresponsibly could also be a big headache.