What is an 80-10-10 mortgage?
An 80-10-10 mortgage is a financing arrangement in which a homebuyer uses two simultaneous loans plus a cash down payment to reach 100% of a home’s purchase price. The breakdown is:
– First mortgage: 80% of the home’s value (loan-to-value, or LTV, = 80%).
– Second mortgage: 10% of the home’s value (a second lien, often a home equity line of credit or HELOC).
– Cash down payment: 10% of the home’s value.
This structure is a form of a “piggyback” mortgage (a second loan taken at the same time as the primary mortgage). It’s commonly used to avoid private mortgage insurance (PMI), which lenders typically require when a buyer’s down payment is less than 20% of the purchase price. PMI protects the lender if the borrower defaults and raises the buyer’s monthly housing cost.
Key terms (short definitions)
– Loan-to-value (LTV): The ratio of a loan amount to the value or purchase price of the property. Lender risk rises as LTV increases.
– Private mortgage insurance (PMI): Insurance paid by the borrower to protect the lender on loans with LTVs above a lender’s threshold (usually 80%).
– Piggyback mortgage: A second loan originated at the same time as the first mortgage to reduce the primary loan’s LTV.
– Fixed-rate mortgage: A mortgage whose interest rate remains the same for the life of the loan.
– Adjustable-rate mortgage (ARM): A mortgage with an interest rate that can change periodically, typically tied to an index.
– HELOC (home equity line of credit): A revolving credit line secured by the home; interest is charged only on the amount drawn.
How it typically works
– The first loan (80% LTV) is usually a conventional fixed-rate mortgage.
– The second loan (10% LTV) is often an adjustable-rate instrument such as a HELOC or a second mortgage. Because it’s secured by the home, its interest rate is normally lower than unsecured credit but higher than the first mortgage.
– Combining the two loans lets the buyer put only 10% cash down while keeping the first mortgage at 80% LTV, which usually removes the requirement for PMI.
Why buyers use it (benefits)
– Avoid or delay PMI: By keeping the primary mortgage at 80% LTV, many lenders won’t require PMI, lowering monthly payments compared with a single 90% loan that carries PMI.
– Potentially lower rate on the main mortgage: First-mortgage interest rates may be lower than for a single larger mortgage with higher LTV.
– Flexibility: A HELOC can function like a reusable line of credit once established.
Main risks and trade-offs
– Higher cost on the second loan: HELOCs and second mortgages commonly carry higher interest rates than first mortgages, which reduces some of the savings from avoiding PMI.
– Variable payments: If the second loan is an ARM or HELOC, its rate (and monthly payment) can rise over time.
– Greater downside if prices fall: In a declining market you’re more likely to have low or negative home equity, increasing the risk of being “underwater” (owing more than the home is worth).
– Complexity and closing costs: Two loans may mean two sets of closing fees and separate terms to manage.
When an 80-10-10 might make sense
– You have ~10% available for a down payment but not 20%.
– You want to avoid PMI for monthly-payment or cost reasons.
– You expect to pay down the second loan quickly (e.g., sell another property, use savings), or you plan to refinance later.
– You accept the variable-rate risk on the second lien or can obtain a fixed-rate second loan.
Step-by-step checklist for evaluating an 80-10-10 loan
1. Confirm current cash available for down payment and closing costs.
2. Get rate quotes and APRs for: first mortgage (80% loan), second mortgage/HELOC (10%), and for a single 90% conventional mortgage (including PMI).
3. Compare total monthly payment and total first-year costs (mortgage payment + interest + PMI or HELOC interest + fees).
4. Check second-loan terms: fixed vs. variable rate, interest-only options, draw period, repayment schedule, and prepayment penalties.
5. Ask about closing costs for both loans and whether any fees duplicate.
6. Consider your time horizon: how long you expect to hold the home and whether you can pay down or refinance the second loan.
7. Stress-test the plan: what happens to monthly payments if the HELOC rate increases or home prices fall?
8. Verify lender policies on removing PMI if you later reach 20% equity.
Worked numeric example (illustrative)
Scenario: Purchase price = $300,000. Buyer has $30,000 cash (10%).
Option A — single conventional loan (90% LTV):
– Mortgage amount: $270,000 (90% of $300,000).
– Buyer would likely pay PMI because LTV > 80%.
Option B — 80-10-10 structure:
– First mortgage (80%): $240,000.
– Second mortgage / HELOC (10%): $30,000.
– Cash down: $30,000.
Comparison notes:
– With Option B the primary mortgage is at 80% LTV, generally avoiding PMI.
– The buyer must pay interest on the $30,000 second loan; that rate is commonly higher than the first mortgage but lower than typical credit-card rates.
– If the buyer expects to eliminate the second loan soon (for example, by selling another property or refinancing), Option B can lower monthly expenses relative to carrying PMI on a 90% single loan.
Practical questions to ask lenders
– What are the interest rates and APRs for both loans and for a comparable single 90% mortgage with PMI?
– Is the second loan a fixed-rate second mortgage or an adjustable-rate HELOC? What are the index and margin?
– Are there interest-only periods, and how long are they?
– What are the closing costs and fees for each loan?
– How, and under what conditions, can I eliminate PMI in the future if I choose the single-loan route?
Sources for further reading
– Investopedia — 80-10-10 Mortgage: https://www.investopedia.com/terms/8/80_10_10_mortgage.asp
– Consumer Financial Protection Bureau (CFPB) — What is private mortgage insurance?: https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-1763/
– CFPB — Home equity lines of credit (HELOCs): https://www.consumerfinance.gov/owning-a-home/loan-types/helocs/
– U.S. Department of Housing and Urban Development (HUD) — Buying a home resources: https://www.hud.gov/topics/buying_a_home
Educational disclaimer
This explainer is for general informational and educational purposes only. It is not personalized financial, legal, or tax advice. For decisions about mortgages or home financing, consult a qualified mortgage professional, attorney, or financial advisor who understands your specific circumstances.