80-10-10 Mortgage

What is '80-10-10 Mortgage'

An 80-10-10 mortgage, also known as a piggyback mortgage, is a transaction in which a first and second mortgage are taken out simultaneously. The first lien has an 80 percent loan-to-value ratio, the second lien has a 10 percent loan-to-value ratio and the borrower makes a 10 percent down payment. 80-10-10 mortgage transactions are frequently used by borrowers to avoid paying private mortgage insurance (PMI).

BREAKING DOWN '80-10-10 Mortgage'

In general, 80-10-10 mortgages tend to be popular at times—such as now—when home prices are accelerating. As homes become less affordable, piggyback mortgages allow buyers to borrow more money than their down payment might suggest.

Example of an 80-10-10 mortgage

Say you want to buy a home for $300,000 and you have a down payment of $30,000 or 10 percent. With a conventional 90 percent mortgage you will need to pay PMI on top of your monthly payments. That’s because lenders worry that a down payment of less than 20 percent puts the loan at risk of default. In addition, a 90 percent mortgage will generally carry a higher interest rate. Instead, you can take out an 80 percent mortgage ($240,000) for a lower interest rate, and avoid PMI. At the same time, you would take out a second 10 percent mortgage ($30,000), typically in the form of a home equity line of credit (HELOC). Your down payment is still only 10 percent ($30,000) but you avoid PMI and get a better rate.

Other benefits of an 80-10-10 mortgage

The second HELOC mortgage functions like a credit card, but with a lower interest rate since it’s backed by the equity in your home. As such, it only incurs interest when you actually use it. That means you can pay off the HELOC (or part of it) and eliminate interest payments. Moreover, once some or all of the HELOC is paid down, the credit line remains and can be used for other expenses, such as home renovations or even education.

80-10-10 loans are also a good option for people who are trying to buy a home but have not yet sold their existing home. In that scenario, you would use the HELOC to cover a portion of the down payment on the new home—then 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 you gain by having an 80 percent (versus a 90 percent) mortgage. This may not be a problem if your intention is to pay off the HELOC within a few years.

But at the bottom line, you’re still borrowing 90 percent of your home value. 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.