80-10-10 Mortgage

An 80-10-10 mortgage is a loan where the first and second mortgages happen simultaneously. The first mortgage lien has an 80-percent loan-to-value ratio (LTV ratio), the second mortgage lien has a 10-percent loan-to-value ratio, and the borrower will make a 10-percent down payment. 

The 8 -10-10 mortgage is also known as a piggyback mortgage.

​​​​​​​The 80-10-10 mortgage, transactions are frequently used by borrowers to avoid paying private mortgage insurance (PMI). PMI is insurance which protects the financial institution against the risk of the borrower defaulting on a loan. 

In general, 80-10-10 mortgages tend to be popular at times when home prices are accelerating. As homes become less affordable, piggyback mortgages allow buyers to borrow more money than their down payment might suggest. This annual insurance can cost between .25% to 2% of the total loan principal. Six main companies in the U.S. sell PMI.

The Doe family wants to purchase a home for $300,000, and they have a down payment of $30,000 or 10% or the total home's value. With a conventional 90-percent mortgage, they will need to purchase and pay PMI on top of the monthly mortgage payments. Also, a 90-percent mortgage will generally carry a higher interest rate. 

Instead, the Doe family can take out an 80-percent mortgage for $240,000 possibly at a lower interest rate, and avoid the need for PMI. At the same time, they would take out a second 10 percent mortgage of $30,000. This type of loan is typically in the form of a home equity line of credit (HELOC). The down payment will still be 10-percent, but the family will avoid PMI costs and get a better interest rate.

The second HELOC mortgage functions like a credit card, but with a lower interest rate since the equity in the home will back it. As such, it only incurs interest when you use it. That means you can pay off the HELOC, in full or in part and eliminate interest payments on those funds. Moreover, once settled, the HELOC credit line remains. These funds can act as an emergency pool for other expenses, such as home renovations or even education.

80-10-10 loans are a good option for people who are trying to buy a home but have not yet sold their existing home. In that scenario, they would use the HELOC to cover a portion of the down payment on the new home. They would pay off the HELOC when the old home sells.

HELOC interest rates are higher than those for conventional mortgages, which will somewhat offset the savings gained by having an 80-percent mortgage. If you intend to pay off the HELOC within a few years, this may not be a problem.

When home prices are rising, your equity will increase along with your home’s value. But in a housing market downturn, you could be left dangerously underwater, with a home that’s worth less than you owe.