80-10-10 kind of financing is quite common. This kind of financing applies for a borrower who cannot afford to make 20% down payment on his mortgage. Many people fit into this category even though they are high earning individuals. Unless you have practiced savings tactics, you could find it difficult to come up with plenty amount of cash equal to 20% to make the down payment.
Now what happens when you do not make that 20% magic figure? If you have read our previous sections you will know that if you do not make 20% of down payment you are most likely to be charged private mortgage insurance, PMI.
For this reason a new financing technique was involved which was known as the 80-10-10 financing. This financing helps you to come up with 20% of down payment where you only put 10% and pay the other 10% by taking a second mortgage. This allows you to circumvent the monthly PMI payment and also a higher rate of interest on your mortgage.
Do not get too hung up on the terminology when we say 80-10-10, as this could be in any other competition as well such as 80-15-5 which means that you only put down 5% down payment and gets the other 15% from your second mortgage.
This kind of financing also help to avoid a jumbo loan if the amount you are borrowing goes beyond the limitations set by Fannie Mae and Freddie Mac on conforming loans. If the amount you are borrowing on a first mortgage exceeds this amount you can use this method to break it down into first and second mortgage and thereby cut down your interest rate by up to .5%. This is so because interest rates on nonconforming loans and jumbo loans are usually higher than conforming loans.
Common Sources Of 80-10-10 Financing
From house sellers
People selling their homes offer a second mortgage either as marketing techniques to induce buyers or because they want to generate income from the loan. Many sellers, specially during the times when selling a home is difficult, offer financing to the borrower.
When the home owner carries a second mortgage it is generally less expensive than a second mortgage made by lending institutions such as banks and credit unions. Also most of the home sellers do not charge for loan origination fee. Seller second mortgages are nearly always short-term balloon mortgages that become due 3 to 5 years from the date of origination.
If you are getting sellers financing for a second mortgage lender for the first mortgage will probably want to review the terms and conditions of the second mortgage. The lender will need to be assured that the payment due on the second mortgage does not make the payment on the first mortgage difficult.
He should be assured that you are not overextending your finances and hence risk the foreclosure in the future.
From institutional lenders
You can get this kind of financing from the same institutional lender who makes you your first mortgage. The terms and conditions will differ from one lender to another. Some mortgage lenders will structure the second mortgage as home equity loan whereas others may offer the conventional second mortgage.
The second mortgage may be a fixed-rate mortgage or an adjustable rate mortgage with a balloon payment. Most of the times second mortgages are adjustable rate mortgages.
If the second mortgage is fully amortized it is usually structured as a 15 year mortgage. As mentioned before, 80-10-10 financing can be structured in any format such as 80-5-15 or 80-15-5.
The lesser down payment you make the more of a risk the lender is taking in giving you a mortgage. So an 80-15-5 will have a higher interest rate and origination fee than a 80-10-10 financing because you are only paying 5% down payment. Also, 80-10-10 will have a higher interest rate as compared to traditional mortgage on which you make a 20% down payment.