An "eighty-ten-ten loan" is a financing arrangement used primarily in real estate transactions to avoid private mortgage insurance (PMI) for a borrower who does not have a 20% down payment. This structure involves three parts: a primary mortgage for 80% of the home's purchase price, a secondary mortgage (often a home equity line of credit or a home equity loan) for 10% of the home's purchase price, and the buyer's down payment of 10%.
Key Takeaways
- PMI Avoidance: The eighty-ten-ten loan structure allows homebuyers to avoid private mortgage insurance (PMI) by splitting the mortgage into two loans, coupled with a 10% down payment. Thus, PMI is not required despite the down payment being less than 20%.
- Loan Composition: This financing arrangement comprises a primary mortgage covering 80% of the home's purchase price, a secondary loan for 10%, and the buyer's 10% down payment.
- Higher Costs on Secondary Financing: The second mortgage in an eighty-ten-ten loan often comes with a higher interest rate than the primary mortgage, potentially increasing the total borrowing cost.
- Stringent Qualification Requirements: Obtaining an eighty-ten-ten loan may be more challenging due to the need for approval for two separate mortgages, necessitating a strong financial profile from the borrower.
Key Components of an Eighty-Ten-Ten Loan
- Primary Mortgage: This loan covers 80% of the property's purchase price. It's the main loan and typically has the best terms and interest rate among the three components.
- Secondary Financing: This second mortgage covers 10% of the purchase price. This loan usually has a higher interest rate than the primary mortgage because it carries more risk for the lender, given its secondary position in case of foreclosure.
- Down Payment: The buyer contributes a down payment equal to 10% of the home's purchase price. This lower down payment makes the eighty-ten-ten loan appealing to buyers who can afford a 10% down payment but not 20%.
Advantages of Eighty-Ten-Ten Loans
- Avoidance of PMI: The primary benefit is avoiding PMI, which lenders typically require when the down payment is less than 20%. PMI can add a significant cost to the monthly mortgage payment.
- Increased Buying Power: This loan structure can increase buyers' purchasing power by allowing them to buy a home with a smaller down payment without the added cost of PMI.
- Flexibility: The secondary loan can sometimes be paid off early without affecting the primary mortgage, offering the borrower financial flexibility.
Considerations
- Higher Interest on the Second Mortgage: The interest rate on the second mortgage is usually higher, which can make the overall cost of borrowing more expensive than some alternatives.
- Qualification Criteria: Qualifying for an eighty-ten-ten loan might be more challenging, as it essentially involves being approved for two mortgages. Lenders will closely examine the borrower's credit score, debt-to-income ratio, and other financial factors.
- Market Risks: If the housing market declines, borrowers could find themselves owing more than their home is worth, as they have made a smaller initial investment in the property.
Conclusion
Eighty-ten-ten loans offer a path to homeownership with less upfront capital while avoiding PMI, but they come with their own set of risks and considerations. It's essential for potential borrowers to carefully evaluate their financial situation, interest rates, and market conditions before pursuing this type of loan arrangement.
FAQs
1. Can the secondary loan in an eighty-ten-ten arrangement be refinanced?
Yes, the secondary loan can typically be refinanced, but the feasibility and financial benefit of doing so depend on the terms of the original loan and current market interest rates.
2. Are eighty-ten-ten loans available for all types of properties?
While widely available, eighty-ten-ten loans may vary by lender and could be restricted based on the property type, location, and the borrower's creditworthiness.
3. How does an eighty-ten-ten loan impact my ability to sell the property in the future?
\An eighty-ten-ten loan doesn't directly impact your ability to sell the property, but the total outstanding debt (from both mortgages) must be settled upon sale. This could affect the net proceeds from the sale depending on market conditions.
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