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Mortgages > Purchase
Is an 80-10-10 mortgage for me?
DONNA MURPHY WESTON, AP Business Writer. Associated Press.
Copyright Associated Press
Q: I'm buying a home and have just 10 percent for a down payment. My lender has suggested an 80-10-10 mortgage as an alternative to paying private mortgage insurance until I reach 20 percent equity. How does this work?
A: The 80-10-10 structure was developed about 10 years ago specifically to help buyers avoid private mortgage insurance (PMI), the insurance lenders require to reduce the risk when lending to borrowers with down payments under 20 percent, said Bud Carter, senior director of residential finance for the Mortgage Bankers Association of America.
With this type of loan, home buyers take a conventional mortgage at competitive rates on 80 percent of the purchase price, put 5 percent to 10 percent down, and take a second mortgage on the rest.
Among the advantages: unlike PMI, interest paid on the second mortgage is tax-deductible.
And even though the second mortgage carries a higher rate _ typically up to 2 percentage points higher than the first mortgage _ the payments often are lower than a 90 percent loan with PMI, experts say.
"PMI is fairly substantial when you get to (just) 10 percent or 5 percent down," said Tom Fiddler, executive vice president at 1st Home Mortgage in Mt. Prospect, Ill. With a second mortgage on 8 to 10 percent of the purchase price, "99 out of 100 times you'll have a lower payment than if you went with PMI," he said.
A scenario drawn up by Wells Fargo Home Mortgage shows the benefit of 80-10-10.
Borrowers A and B both purchase a home valued at $250,000 and both put $25,000, or 10 percent, down. Borrower A selects a 30-year fixed rate mortgage at 7.125 percent to finance the remaining $225,000, while Borrower B opts for a 30-year fixed rate mortgage at 7.125 percent to finance $200,000 and a second mortgage at 9 percent for the other $25,000.
Borrower A would have a monthly payment of about $1,613, of which $97.50 would be for PMI. Borrower B, however, with the 80-10-10 would have a payment of about $1,572, a difference of nearly $500 over a year.
PMI is paid only until a buyer reaches 20 percent equity, but because most of the mortgage interest is paid in the first years of a 30-year loan, it could take years to reach that threshold.
"You can pay off a second mortgage faster than you could reach 20 percent," said Joe Rogers, national sales manager at Well Fargo Home Mortgage.
Fiddler said the only time it makes sense for a buyer to go with PMI is when he or she is very close to having 20 percent equity.
In that case, you can pay a little extra toward principal, he said, so that "within a year or so, you can drop PMI forever."
• Apply now for a home loan!
On the Net: Mortgage Bankers Association of America: http://www.mbaa.org/ Wells Fargo Home Mortgage: www.wellsfargo.com/mortgage/ 1st Home Mortgage: www.1sthomemortgage.com
End advance for use any time
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
Dateline: Undated
Text Word Count 490
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