The 80/20
LTV=80%,
CLTV=100%
Sometimes referred to as a “piggy
back” loan, this is TWO loans on one transaction.
Both loans are normally from the same lender.
The first mortgage is 80% of the Sales Price (or Value if it’s a
refinance). The second mortgage is
20% of the
The first mortgage is usually a 30-year
fixed, but could be an Interest Only (I/O).
The loan is a creative 100%, NO money down product.
Something else good about this loan is
that there is NO PMI. PMI is based
on the first mortgage. With this
loan, the first mortgage is 80% (or lower), therefore.. no PMI.
The rates on the first are normal
(unless it’s a hard credit situation), but the rate on the second is much
higher (in some cases 3-4% higher) and is based on a 30 due in 15.
A 30 due in 15, means the payments are based on a 30 year mortgage, but
the loan is due in 15 years. In
other words, it’s a balloon payment.
Most people will use this creative
financing to purchase with no money down and to avoid PMI, but will refinance or
sell at some point in the future.
Why avoid PMI?
100% financing would cost a small fortune.
The PMI rate might be 1.05% or higher.
On a $100,000 loan the PMI payment would be $87.50 per
Let’s look at a scenario.
Now, let’s look at a straight 100%
loan. If you provided a full 100%
First mortgage only loan (Assuming you could find a lender who will do it), the
rate would be approximately 1.5% higher based on the high LTV (risk is higher).
In our scenario, the rate would be 7.25% with a payment of $2,683.53.
But wait, now add the PMI, which would be at least another $393.75.
Total payment would be $3077.28.
The savings would be $426.53.
I know, you’re saying no principal will be paid for 5 years and then
the loan will be an adjustable… and you’re right.
But, how much principal do you think will be paid in a 5-year period
anyway? The answer is not much (the
actual answer is $26,000, although you would have paid over $184,000 in
payments). However, a $426 savings
would be over $25,000 in 5 years. Could
you use that money?? In
addition, the loan balance has not been reduced, but how much will the home
APPRECIATE over the next 5 years? A
refinance into a fixed rate at that time would eliminate the ARM and since the
home will appreciate, PMI will most likely be eliminated.
Is this loan for you?… As far as
I’m concerned, $25,000 in my pocket is better than the pocket of the bank.
80/15/5
This
is the same kind of loan as the 80/20, but you will put 5% down.
There are many versions of “piggy back” loans.
Some include… 75/15/10 or 80/5. In
the case of an 80/5, this would be a CLTV of 85%, where the first mortgage is
80% and the second loan is another (or additional) 5%.
Dan Palumbo, Licensed Mortgage Banker 800-817-8743
Dan is the published author of the Mortgage Loan Officer Training Manual. You may order one by visiting www.mortgagetrainingmanual.com
Licensed Mortgage Banker - New Jersey Department of Banking and Insurance; Licensed by the Pennsylvania Department of Banking; Virginia Licensed Mortgage Lender