An 80/20 mortgage loan is where, for a new home loan, there are two separate loans with two separate payments. There are also two separate interest rates and the loans are usually funded by separate companies. The two loans consist of 80% of the loan amount and 20% of the loan amount.
Some of the benefits to having an 80/20 mortgage loan are:
1. No PMI – Private mortgage insurance is a monthly payment that every borrower needs to pay when they purchase a home with less than 20% down. PMI is insurance for the lender to protect the lender against losses should the borrower default on their loan. PMI does not insure the borrower in any way. When you split your mortgage into two loans, one loan is for 80% of the loan amount and the other is for 20% of the loan amount. So, PMI is not necessary for the first mortgage.
2. Qualify for 100% Financing on Your Mortgage – Many times a borrower might not be able to qualify for 100% financing on their mortgage loan unless they do the 80/20 setup with their loan.
3. Lower Interest Rate on 1st Mortgage – Let's say you expect to be able to pay down a significant amount on your mortgage loan in the near future. It works in your best interest to get an 80/20 mortgage loan, because as you quickly pay off the second mortgage, your interest rate on your first mortgage will be much less than if you had financed all 100% of the loan through one company . Usually the interest rate on the second mortgage is much higher, but that is nullified if you pay the second mortgage off quickly.
There are many ways to use creative financing to finance a mortgage without any down payment. Try consulting with more than one broker to find out what all of your options are before you decide.