80-20 Mortgages

An 80-20 mortgage, or tandem loan or piggyback mortgage is taking out two mortgages to purchase a home. The first mortgage is for eight percent of the purchase price of the home and the second mortgage is for twenty percent of the purchase price of the home. Structuring the home purchase in this manner allows the buyer to purchase the home with no down payment.

80-20 mortgages are suitable for prospective homebuyers that do not have a lot of money available for their purchase, or would choose to use their cash for another purpose. It can be a great option for first-time homebuyers that don't have money from the sale of a previous home. An added bonus of an 80-20 mortgage is that it usually allows you to avoid private mortgage insurance (PMI).

There are drawbacks to financing your home purchase with an 80-20 mortgage. The biggest drawback is that you will pay a higher voerall interest rate. Typically the second mortgage in the package comes with an interest rate that is higher than most first mortgages.

Another drawback to the 80-20 mortgage is that it is slow to produce home equity. Until both loans are paid down significantly the homeowner will not be able to qualify for home equity loans, HELOCs or even mortgage refinancing. If the home is sold both loans will need to be paid off. The lack of equity may cause the homeowner to need another 80-20 mortgage to purchase a replacement home.

After having the loans for a few years and building a little bit of equity it is common for people to ask how to consolidate and 80-20 mortgage, or how to consolidate a first mortgage and second mortgage. This is simply a matter of doing a mortgage refinance. As long as both the first and second mortgages were used in their entirety to purchase the home there usually are no extra fees or higher rates involved.

In general an 80-20 mortgage is great for someone that wants to buy a home with minimal money out of pocket. A homebuyer should be aware of the shortcomings that are involved with this type of financing before proceeding with an 80-20 mortgage.