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Home prices continue to soar and borrowers are turning to 100-percent financing in greater numbers, especially multiple home loans that can sidestep the need for mortgage insurance.

80-20 mortgages are one of the types of loans that fall into this category. An 80-20 loan is a method employed whereby the prospective homeowner will take out a first loan for 80% of the purchase price and a second loan for the remaining 20% of the money needed to acquire the desired property. Remember, he will be expected to also pay the closing costs.

For people who do not want to tap into their savings, or cannot or will not come up with a down payment, this strategy is a good one. Younger folks who have established good credit, have secure employment, but have not amassed a tremendous amount of savings, look to this method more frequently now.

Tired of the Rent Money Going Down the Drain?

How many people do you know who are endlessly flushing rent money down the drain and are never able to accumulate enough savings to actually purchase a property? These are people who can easily make the payments but are never able to get far enough ahead to actually purchase. They are stuck in a cycle that seems to never end. All they can do is pay their monthly rent and watch the price of owning a home grow further from their reach.

There are many programs for borrowers that allow for them to purchase with very little down but then burden the new owner with the requirement for a PMI, private mortgage insurance.

A PMI policy is usually required when the loan amount exceeds 80% of the selling price of the property in question. The lenders feel that they are at greater risk and wish to offset the possibility of costs associated with foreclosure in the event the borrower defaults, or is late on the mortgage payments. One way to avoid this scenario, paying for PMI, is to use a "piggyback" loans.

The piggyback loan is for 20% of the home's selling price, less any down payment, and it rides on top of the first loan that is for 80% of the cost. So if you were to make a 7% down payment, get a first loan for 80 and the second loan for 13%, you would then have an 80-13-7 loan. Almost any ratio of figures is possible.

Higher Rate for the Second Loan:

In most instances the interest on the second loan is higher than that of the fist loan but a savings is still realized. The combined cost of the two loans is still less than that of an 80% loan that will require the homeowner to pay for PMI. Also, homeowner's insurance can be deducted from your federal income taxes if you are someone who itemizes deductions.

Note: Mortgage interest is deductible but mortgage insurance is not.

Further, these combination loans can also include a mix of ARMS, which are based on a 5/1, meaning the first 5 years are at a fixed rate and then they are adjustable after that, and the second loan is possibly an equity loan that could change with the prime rate. Most folks will refinance this type of loan after only 3 or 5 years.

What Are the Pros and Cons of All of This?

The upside of an 80-20 loan structure is that it allows you to get into a home with very little money down as long as you can cover the closing costs.

However, the downside can be a big one. If the property values plummet, or retract in any way because you may have purchased your home during hot market conditions, the value of the your loan will be greater than the actual value of the property. Then, if for some reason you are compelled to sell your home, you will need to come up with the difference between what you owe to the lender and what the selling price of your home may actually be.

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