Exploring Eighty-Fifteen-Five Loans: A Strategy to Bypass PMI

An "eighty-fifteen-five" loan arrangement is a financing strategy used primarily in real estate purchases to avoid paying Private Mortgage Insurance (PMI). This structure involves a primary mortgage for 80% of the home's purchase price, a second mortgage or home equity loan for 15% of the purchase price, and a down payment of 5% made by the buyer.

Key Takeaways

Components of an Eighty-Fifteen-Five Loan

1. Primary Mortgage: The main loan covers 80% of the property's purchase price. It typically comes with the best interest rates and terms because it is the primary lien on the property and carries the lowest risk for the lender, and typically comes with the best interest rates and terms.
2. Second Mortgage: This loan covers 15% of the purchase price. It can be a home equity loan or line of credit (HELOC). The interest rates for this portion might be higher than the primary mortgage because it is in the second position, meaning it gets paid after the primary mortgage in the event of a default.
3. Down Payment: The buyer contributes a down payment that covers the remaining 5% of the home's purchase price. This smaller down payment makes homeownership more accessible to buyers who might not have much cash on hand.

Advantages of an Eighty-Fifteen-Five Loan

• Avoid PMI: The primary advantage is avoiding PMI, which lenders typically require for loans with a down payment of less than 20%. PMI can add a significant cost to the monthly mortgage payment.
• Accessibility to Homeownership: This financing strategy can make homeownership more achievable for buyers with limited savings for a down payment.
• Flexibility: Depending on the lender and the specific loan product, the second mortgage might offer flexible repayment options.

Considerations

• Qualification Requirements: Qualifying for two mortgages simultaneously can be challenging. Lenders will scrutinize the borrower's credit score, debt-to-income ratio, and other financial factors more closely.
• Interest Rates and Terms: The second mortgage typically has a higher interest rate than the first mortgage, potentially increasing the overall cost of borrowing.
• Financial Risk: Managing two mortgage payments can increase the borrower's financial risk. If the housing market declines, the homeowner could owe more than the house is worth.

Conclusion

An eighty-fifteen-five loan arrangement offers a pathway to homeownership with a lower down payment and no PMI, but it requires careful consideration of the financial implications and risks. Potential homebuyers should evaluate their financial stability and the housing market to determine if this strategy suits their situation.

FAQs

1. Can the second mortgage in an eighty-fifteen-five arrangement be paid off early?

Yes, depending on the loan terms, borrowers can often pay off the second mortgage early, reducing overall interest costs and monthly payments.

2. Are eighty-fifteen-five loans available for all types of properties?

Availability may vary by lender and could be limited to certain types of properties or borrowers. It's important to consult with lenders about their specific requirements and offerings.

3. What happens if I default on the second mortgage but stay current on the first?

Defaulting on either mortgage puts the home at risk of foreclosure. Lenders for the first and second mortgages have legal rights to initiate foreclosure proceedings, although the primary mortgage holder has the first claim.