What is 80-10-10 financing?
Surprising as it may seem, some folks with hefty incomes find that it’s
mighty tough for them to save enough money to make a 20% cash down payment on
their dream homes. Using conventional financing, such buyers must purchase Private
Mortgage Insurance (PMI) which increases the cost of home ownership and, ironically,
makes it even more difficult to qualify for the mortgage. However, if you’re
a dues-paying member of the cash-challenged class, don’t despair. Given
that your income is sufficiently high, it’s eminently possible to avoid
getting stuck with PMI. That is why 80-10-10 financing was invented. It is called
80-10-10 because a savings and loan association, bank, or other institutional
lender provides a traditional 80% first mortgage, you get a 10% second mortgage,
and make a cash down payment equal to 10% of the home’s purchase price.
By using this method, you are no longer obligated to take out PMI on your property.
The same principle applies if you can only afford to make a 5% down, 80-15-5
financing is also available. However, because a smaller cash down payment increases
the lender’s risk of default, do not be surprised when you are asked to
pay higher loan fees and a higher mortgage interest rate for 80-15-5 than you
pay for 80-10-10.