80/15/5 Financing for your Purchase

80/15/5 simply means that you are obtaining a first mortgage loan for 80% of the purchase price and putting 5% down as your down payment and also obtaining a second mortgage for 15% of the purchase price. 80/15/5 financing is just like 80/10/10 financing except for the fact that the lender is taking a greater risk with only 5% down payment. Consequently 80/15/5 financing is slightly more expensive than 80/10/10 financing however is still less expensive than the loans with private mortgage insurance or lender paid mortgage insurance.

Not all lenders will allow 80/15/5 financing on all products and there is usually an additional fee for utilizing the 80/15/5 option. Generally the fee is anywhere from .25% to .50% in additional points. Even with the additional fee it is less expensive than traditional private mortgage insurance.

Loans that have less than 20% down payment will require some type of private mortgage insurance or lender paid mortgage insurance unless the borrower utilizes secondary financing (a second mortgage). Both private mortgage insurance and lender paid mortgage insurance can be expensive in comparison to using 80/15/5 or 80/10/10 financing.

For example let's use a $300,000 purchase price and compare an 80/15/5 and a 5% down loan with mortgage insurance:

The total savings are $134.31 per month and $1611 per year. In addition you can deduct the full amount of the interest on the 80/15/5 loan. The mortgage insurance is not tax deductible.

NOTE: Interest rate used on the 1st mortgage with mtg. insurance above was 7% APR 7.704. Mortgage insurance factor used was .78%. The rate on the 80/15/5 financing was 7.125% APR 7.167 and the rate on the 2nd mortgage was 7.99% APR 8.267%. Rates used are for example only. Rates change daily. This is not a commitment to lend.

As you can see there is a fair amount of savings with the 80/15/5 scenario. The second mortgage can have some additional costs involved depending on the loan program and the lender you use but those can generally be recouped in a relatively short period of time. You will also have to write two checks each month for the 1st and the 2nd mortgage but this is a relatively small inconvenience based on the savings. If you have good credit and good ratios the 80/15/5 scenario will probably be less expensive than the loan with mortgage insurance.

Things to watch for:

• With 80/15/5 financing you will find that while lenders will allow for higher ratios generally speaking, the qualifying is more conservative than loans with mortgage insurance.
  
• There are loan amount limitations on 80/15/5 financing. While 1st mortgage loans above $650,000 can utilize secondary financing to avoid the mortgage insurance, the competitively priced lenders usually require more than 5% down. Call for details on loans over $650,000.
  
• Home equity lines of credit (HELOCS) are a good choice as they allow for interest only payments and can generally have low or no closing costs. HELOCS can vary but generally have interest only payments for the first 10 years and then are fully amortized over the next 20 years. Most have annual fees ranging from $20 on up. Some have prepayment fees and some do not. The rates on HELOCS are adjustable generally tied to the Prime Rate plus a margin. The margin will depend or your credit score loan to value, and your debt to income ratios.
  
• 2nd mortgage fixed rate fully amortized loans generally come in two types. 15 year fixed or 30 years due in 15 years. The 30-year due in 15 years have a balloon payment at the end of 15 years and you will need to refinance. The good thing is the rate is fixed for the full 15 years.
  
• Non permanent resident aliens (without green cards) will have a difficult time utilizing an 80/15/5 program. Most of the competitively priced second mortgage lenders require the borrowers to be permanent resident aliens.
  
• Generally second mortgages rely on good credit scores and good ratios for the best rates
  
• Lender Paid Mortgage Insurance is another way to avoid mortgage insurance. With Lender Paid Mortgage Insurance the lender raises the interest rate to cover the costs of insuring the loan themselves rather than using an outside mortgage insurance company. In most cases the 80/10/10 financing is still less expensive.

Give us a call we would be happy to go over the details of 80/10/10 financing or 80/15/5 financing.

Equal Housing Lender.
Licensed by the California Dept of Real Estate
Real Estate Broker License Number 01267066
Dept of Real Estate Phone 916-227-0931