The concept of 100% financing mortgage loans is becoming increasingly popular. These loan options give prospective homeowners the ability to purchase a home even if they do not have enough savings for a down payment. One popular mortgage options which enables the homeowner to purchase a home without making a down payment is an 80/20 mortgage loan. With this loan the homeowner takes out one loan for 80% of the cost of the home and another for the remaining 20% of the value of the home and is only required to come up with closing cost to purchase a home. This type of mortgage is appealing to many but it is important to consider both the pros and the cons of this type of loan.
Advantages of 80/20 Mortgage Loans
The major advantage of an 80/20 mortgage loan is the ability to purchase a home with very little money down. As previously mentioned, the homeowner only needs to come up with the money for closing costs because they finance 100% of the value of the home. This is ideal for prospective homeowners who have the ability to repay a loan but do not have sufficient savings for a traditional down payment. This is also ideal for homeowners who have enough savings for a down payment but prefer to use this money for other purposes.
Disadvantages of 80/20 Mortgage Loans
The major disadvantage of 80/20 mortgage loans is the uncertainty of the future. If the home loses value, the homeowner would have to come up with additional cash to repay the loan if he decides to sell or refinance the home. This is because the value of the home would not be sufficient to repay the original loan. In the case of selling the home after the value drops, the homeowner would not recoup enough money from the sale of the house to fully repay the loan. In the case of refinancing the home, the refinancing mortgage would be based on the appraisal value of the home.