Most banks and lenders insist that a home buyer pay for private mortgage insurance if they do not have a down payment of at least 20% of the home's appraised value. Of course, If you can afford 20% down, you will not need PMI. If you don't, however, have 20% to put down, the 80-10-10 is an approach that still allows you to avoid the PMI payment.
So, what is an 80-10-10 mortgage? ...
An 80-10-10 mortgage breaks up the mortgage loan into two separate loans. 80% of the loan is financed as a first mortgage, typically at current competative rates. 10% of the loan is then in a second mortgage, usually at a slightly higher rate. The final 10% comes from a cash down payment.
Advantages of the 80-10-10:
- Allows you to purchase a home sooner, since you need only 10% down instead of 20%
- If you are shopping in an area where home prices are rising, this quicker purchase can ultimately save you money
- While you do pay a higher interest rate on the second loan, it's tax deductible, whereas a PMI payment is not
- If you have the 20% down, but need the money for moving expenses, furniture, etc, the 80-10-10 gives you options
There is, of course, more risk involved when you put less money down. If home prices drop, you may end up owing more for the house than it's current appraised value. It's also more complex to refinance later if interest rates drop, since you are managing two loans. Be sure to have your mortgage broker run the numbers for you so you can directly compare the 80-10-10 approach with more traditional approaches.
Also see our related article, How to avoid paying PMI.
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