80-20 Mortgage Loan Programs

Home and condo values have escalated in recent years and home buyers are looking for alternative programs to increase their purchasing power and keep their monthly mortgage payment as low as possible. The 80-20 30 Year Fixed and Interest Only mortgage loan programs have grown tremendously in popularity because they are designed to help you qualify for more home, keep your monthly mortgage payment low, and to avoid PMI (Private Mortgage Insurance) which is insurance designed to protect the lender from individuals who default on their loans and who have less than 20 percent equity in their property. Borrowers do not want to pay PMI because it usually increases their mortgage payment and it is not tax deductible.

The 80 20 home loan program is a zero down loan program which you have a 1st mortgage for 80% of the purchase price and a 2nd mortgage for 20% of the purchase price. Let's take a look at an example of this program versus traditional zero down program with PMI :

As you can see, the total payment is much lower for the 80 20 mortgage loan program plus the tax savings is greater* and there is no PMI. Also, you would qualify for approximately $30,000 more house in this example. Ideally, you would want to pay off the 2nd mortgage faster so you will be left with just 1st mortgage payment of $934 after the 2nd mortgage is paid off. The 80-20 30 Year Fixed mortgage is great for borrowers who intend to live in their home or condo for a long time.

80-20 5/1 ARM Interest Only Program

The 1st mortgage will be 80% of the purchase price and the interest rate will be fixed for 5 years. Borrowers will be required to make interest only payments but they can choose to pay more than the interest if they desire without any penalty. The second mortgage will be a home equity line and require interest only payments like the 1st mortgage. The payment is so much lower than a traditional principal and interest type loan and you would qualify with the interest only payment. Let's take a look at an example of this program versus the traditional 30 Year Fixed program:

As you can see, the total payment is $408 lower than the traditional 30 Year Fixed mortgage and tax savings is about the same*. Also, you would qualify for approximately $100,000 more home or $300,000 purchase price with this program. This program is designed for borrowers who will move or refinance within 5 years, otherwise the 30 Year Fixed mortgage loan option may be best for you. Finally, if you don't pay a dime toward the principal balance of the loan, you will still gain the appreciation in the property which could be greater with a higher priced home. Remember, you reduce the principal very little in the first few years of a traditional 30 Year Fixed principal and interest mortgage loan.       

There are a few points worth mentioning here. The 30 Year Fixed and 5/1 ARM Interest Only programs above require good credit but there is an 80-20 program for borrowers who have a 580 middle credit score. Also, the 80/20 Interest Only Arm loan program can have many differerent options such as 6 month, 1 year, 2 year, 3 year, 5 year, etc. Also, there are 80-15-5 and 80-10-10 programs available for both fixed rate and arm loans which are 5% and 10% down payment options respectively but the mortgage payment will not be much lower for these programs. For example, your monthly payment will be approximately $90 lower for $200,000 purchase utilizing 80-10-10 5/1 ARM Interest Only program with 5.25% interest rate (5.29% APR). This begs the question: Couldn't you use the $20,000 for home improvements, furniture, or savings?

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