Home Loan Guidance Topics

When Two Loans are Better than One,
the "80-10-10" and Variations on the Theme

The best interest rates are available to people who can make a down payment of at least 20% or more. So, when you get a loan at 80% LTV, it can have a much lower interest rate than a loan at 85% LTV.

One way to avoid this problem of having less than a 20% downpayment is to get two loans instead of one. Essentially, you will have a first mortgage loan and a second mortgage loan. The first mortgage loan will be for 80% of the home's value, ensuring that you get one of the cheapest interest rates and avoid that terrible PMI. The second mortgage loan will be for the remainder of the loan that you need that cannot be covered by your down payment.

For instance, say you are buying a home for $100,000. After all the closing costs and the need for reserves and other expenses associated with buying the home, you have only $10,000 left for the down payment. You could get one mortgage loan for $90,000 that will probably not have the best interest rates available. Also, you will be forced to pay PMI on top of the interest, calculated as a percentage rate times the total $90,000.

Instead, you decide to use an "80-10-10" (pronounced "eighty, ten, ten"). So, you get a loan for $80,000 that will have one of the most competitive interest rates available because you are staying at or below the 80% loan-to-value rule. Then you get a second mortgage for 10% of the value ($10,000 in this example) to cover the total balance needed of $90,000. You will also provide your down payment of $10,000, the last 10%, to get you to 100% of the home's value. Hence the name "80-10-10."

One key element is that you should be able to avoid PMI this way. Also, your interest rate on the first mortgage for $80,000 will be less than the interest rate you would have had on a $90,000 (or 90% LTV) loan. Your second mortgage would have an interest rate higher than either the 80% LTV loan or the 90% LTV loan had you gotten one. However, the weighted average interest rate between the two loans, plus the absence of PMI, can often be far better than one loan that is 90% LTV.

The mortgage brokers might not always bring up the possibility of the 80-10-10 because it means more paperwork for them, and probably little additional commission. However, if the mortgage broker realizes that you know enough to ask about an 80-10-10, he or she may also suspect that you know enough to compare loans with other mortgage sources and will go elsewhere if they don't help you.

Also, the loan does not have to be exactly 80-10-10 in terms of percentages. For instance, you could have an 80-15-5, where you only have 5% for the downpayment, but still want the larger balance of your home loan to get those favorable 80% LTV interest rates and absence of PMI.

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