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Nearly half of all first-time homebuyers financed the entire cost of their home
rather than paying a hefty down payment. And many of these zero-down buyers did so thanks to the so-called 80/20 mortgage plan. This is a relatively new type of loan that was especially designed to help buyers who want to avoid paying down payments. As housing prices have skyrocketed
more and more buyers with good credit and strong income find that they cannot afford a home because of the difficulty in saving up enough to make the large down payment. On a home worth $200
0
a 20 percent down payment is a whopping $40
0
To respond to this challenge
mortgage companies began offering the 80/20 option.

Sometimes the 80/20 is referred to as a “piggyback” loan
because in reality it is two loans working in tandem as one. The first part works in a conventional way
and is for 80% of the purchase price. The 2nd part – the smaller one – is a 20 % loan. So when you apply for your mortgage
the lender actually qualifies you for 100 percent of the purchase price of your home
and then divides the loan into two sections.

For example
if you want to buy a house worth $100
0
the down payment of 20 percent will cost $20
0
With an 80/20 mortgage
the lender gives you $80
0
at one interest rate
and then gives you the 20 percent down payment of $20
0
at a somewhat higher rate
for a grand total loan amount of $100
0
reason for splitting up the mortgage into two distinct parts is to help you qualify for the loan without a down payment. Normally you have to put 20 percent down to get a conventional 80 percent loan
so with this rather clever mortgage plan
the lender is letting you borrow your down payment. Then the same lender can turn around and let you borrow the rest of the loan.

Yes
it does sound a little bit contrived
and it is indeed a rather complicated way to arrive at a basic mortgage. But what really counts for those trying to avoid a big down payment is that it works
and helps to overcome the down payment hurdle.

You can expect to pay higher rates on the down payment or 20 percent portion of the loan. But the rates are still reasonable
and this loan arrangement allows you to buy without first saving massive amounts of money to use for your down payment. Later
if you decide to pay off the 20 percent loan to lower your monthly payments
that is an option available to you. Many homeowners refinance once they have had a few years to increase their equity
and convert their 80/20 into a more traditional type of mortgage.