At today’s housing prices, there’s no shame in not being able to afford a 20% down payment. One alternative to a traditional mortgage with 20% down is an 80-10-10 mortgage. 80-10-10 mortgages, also called piggyback loans, let you buy a home with only 10% down and avoid having to pay for private mortgage insurance (PMI). They do this by allowing you to get a second mortgage on the property you’re buying, a home equity loan or home equity line of credit (HELOC), to finance half the traditional 20% down payment. This will mean two mortgage payments each month, and it could have other drawbacks, but some homebuyers find an 80-10-10 mortgage a good match for their financial situation.
Traditional homebuying was pretty straightforward. Once you and the seller agreed to a price, you paid 20% of that amount as a down payment and financed the rest through a mortgage lender. The mortgage loan you took out covered 80% of the purchase price, and your mortgage agreement created a lien against your property. This lien allowed your lender to force a foreclosure sale if you failed to make your monthly principal and interest payments. Barring a big drop in home prices, your 20% down payment ensured a foreclosing lender wouldn’t be out of pocket even if you defaulted early.
From traditional mortgages to today’s alternatives
This traditional arrangement served homebuyers well for many years, and mortgage liens and foreclosure still follow tradition. But rising home prices have made the traditional arrangement, with its 80% loan-to-value (LTV) ratio, untenable for many buyers today.
“So what,” you ask. “Haven’t incomes risen just as fast?”
Not quite. At the end of 1995, when the median U.S. home price was $138,000, a 20% down payment was only $27,600. By the end of 2020, the median home price had reached $358,700, yielding a 20% down payment of $71,740. That’s 260% of the 1995 down payment. Meanwhile, the Census Bureau estimates that, in current dollars, median income rose from $34,076 in 1995 to $67,521 in 2020. That’s just 198% of the median income in 1995. Since 1995, income has not risen as rapidly as home prices.
Why play with the percentages rather than just compare dollar figures? The Census figures adjust income to current dollars. By converting both series of figures into percentages of their 1995 values, we get just a sense of how each has changed relative to where it started. This lets us compare the rates of increase without worrying about the dollar amounts.
Since income hasn’t kept up with home prices and the down payments that go with them, alternative financing arrangements are essential to many buyers.
One such arrangement is an 80-10-10 mortgage. This article will tell you what you need to know about 80-10-10 loans, including what they are, how they work, why you should or shouldn’t get one, and what alternatives you can consider instead.
What is an 80-10-10 mortgage (piggyback loan)?
The “80-10-10” of “80-10-10 mortgage” stands for “80%, 10%, 10%.” With this sort of home-purchase financing, you get a first mortgage (primary mortgage) to finance the usual 80% of the home’s purchase price (80% LTV). Rather than pay the balance as a down payment, however, you get a second mortgage (subordinate mortgage) for 10% of the purchase price (10% LTV). This leaves 10% to cover with your down payment.
The first mortgage will normally be a standard fixed-rate mortgage, usually with a 30-year term, though an adjustable-rate mortgage (ARM) is not impossible. The second mortgage will be a home equity loan or home equity line of credit (HELOC) and could have an adjustable interest rate. Both mortgages are secured by the property you’re buying.
Since the second mortgage is granted at the same time and “piggybacks” on the first, an 80-10-10 mortgage can also be called a piggyback loan or piggyback mortgage. Though an 80-10-10 deal comprises two mortgages, only one of which rides piggyback on the other, lenders and borrowers alike routinely call the whole arrangement an 80-10-10 mortgage or piggyback mortgage. This article does the same.
How does an 80-10-10 mortgage work?
Normally, if you finance a home purchase with less than 20% down, your mortgage lender will require that you purchase private mortgage insurance (PMI). This insurance protects the lender in case you default before you’ve made enough payments, and built up enough equity, for a foreclosing lender to make out alright on the deal — or at least not lose too much money.
Pro tip: You can use two lenders instead of one, but be careful
For simplicity, this article assumes an 80-10-10 package deal through a single lender. But you might also arrange the first and second mortgages through separate lenders. If you do, make sure that you don’t hide what you’re doing from either.
Some borrowers who can’t afford 20% down try to cover their down payment by arranging a silent second mortgage through a second lender. Ensuring that this second mortgage doesn’t get recorded until the first lender has finished a title search and approved the loan, these borrowers can get better first-mortgage terms. They also risk prosecution for mortgage fraud.
80-10-10 means no PMI, but why?
Superficially, an 80-10-10 mortgage arrangement would not seem to eliminate the need for lender protection. After all, 90% of the purchase price is coming from loans secured by the property. One would think lenders would still require PMI in this case. Piggyback mortgages do not appear to reduce the risk of default or speed up equity accumulation in the home.
Despite these considerations, an 80-10-10 mortgage does eliminate the PMI requirement. This is the main reason homebuyers consider these loans. Viewed in isolation, eliminating costly private mortgage insurance certainly seems worthwhile. But if a lender were to, say, make up for the lost PMI protection by charging you higher fees or more interest, you might have second thoughts.
Look the 80-10-10 gift horse in the mouth
So, before you get too excited about the possibility of an 80-10-10 piggyback loan, make sure you look at more than just how much you’ll save when you avoid paying for PMI. Will it be harder to qualify for an 80-10-10 mortgage than a traditional 20%-down mortgage with the same lender? If so, this could be a good sign. If you need to have better credit to get the 80-10-10 offer, this means your lender only offers this mortgage product to less risky borrowers. Your lender may, therefore, see less need to mitigate risk in other ways.
What other ways? Since you won’t be paying PMI costs, yet will only be paying 10% down, your lender could seek to improve the profit-to-risk profile by getting more money from you by other means. So you should pay close attention to origination costs and interest rates.
Before accepting an 80-10-10 loan offer, answer these questions:
- How do the combined origination costs for the two loans in the 80-10-10 arrangement compare to
- the cost of originating a single mortgage with 20% down?
- the cost of originating a single loan with 10% down?
- How does the combined interest cost of the 80-10-10 pair of loans compare to
- the cost of interest for the 20%-down mortgage?
- the cost of interest plus PMI for a 10%-down single mortgage?
Saving on PMI costs is good. Spending as much or more on a higher monthly interest payment or higher origination costs, canceling out your savings on PMI payments, is not so good.
Should you get an 80-10-10 mortgage?
The most important aspect of how an 80-10-10 mortgage works is how, or if, it works for you. Have you closely inspected your lender’s first mortgage and second mortgage proposals? Have you carefully reviewed the fees and interest and compared these with the fees and interest of other mortgages? Does not having to pay PMI costs save you enough to make up for any extra fees or interest you’ll incur by taking on the two mortgages of an 80-10-10 deal?
If the numbers look good and you’re confident you can make both the first and second mortgage payments each month without fail, going ahead with the 80-10-10 loan could be prudent. Depending on how certain they are, your future plans to sell or refinance could also affect your decision. Given when you’re planning to sell or expecting to refinance, is the 80-10-10 arrangement the best approach for you? Or would the double monthly mortgage payment lock up income you could use more productively for other things?
To help you as you make your decision, here’s a list of some key pros and cons of 80-10-10 mortgages.
Here is a list of the benefits and drawbacks to consider.
- PMI savings. By not having to buy private mortgage insurance, you’ll save $20–$70 per month per $100,000 financed.
- Lower down payment. An 80-10-10 mortgage requires a lower down payment, so you can put your savings to work in other investments.
- More deductible interest. Interest on both the mortgages will be deductible if you itemize, up to current limits.
- More mortgage debt and two monthly mortgage payments. Is having to service more debt every month worth the benefits an 80-10-10 deal delivers?
- Risk of rising rates. The second mortgage in an 80-10-10 often has a variable interest rate. If rates rise after you commit to this, so will your monthly payment.
Your plans and finances are unique. So only you can determine if any financing arrangement, whether an 80-10-10 piggyback loan or something else, is your best option. SuperMoney’s search tools and reviews can help.
How 80-10-10 loans are structured
You already know the basic structure of these loans: primary mortgage for 80% of the purchase price, a second mortgage for 10%, and cash down payment for the final 10%. Let’s look at this structure more closely.
First mortgage: fixed or adjustable rate
As already noted, the 80% first mortgage in an 80-10-10 setup will usually be a standard 30-year mortgage with a fixed rate. Borrowers unable to cover a 20% down payment and worried about the cost of PMI aren’t usually interested in a shorter term like 15 years. After all, a shorter term means higher monthly payments. Terms that are longer than 30 years are non-qualified mortgages. This means they’re riskier for lenders and typically have higher fees and interest rates.
On the subject of lower monthly payments….
With an 80-10-10 mortgage, you trade higher (combined) monthly payments for a lower down payment. But what if it’s the monthly payments that you want to lower? One option is a balloon mortgage. This type of mortgage reduces monthly payments by shifting some or all of the principal payments to a lump-sum payment due at the end of the loan term. These mortgages have several drawbacks and are not the best option for most borrowers, but they could be a good option for some, possibly even you.
Though the first mortgage in your 80-10-10 deal will probably have a fixed rate, an adjustable rate is possible. The 80% primary mortgage can be an ARM. Adjustable-rate mortgages will have a fixed rate for some number of years followed by regular rate adjustments, most often yearly and usually capped, resulting in changes in your monthly payment. In theory, lenders can structure ARMs in multiple ways, within the limits of federal and state laws. Some ARM types currently available include the following.
Three noteworthy ARMs
- 3/1 ARM. This mortgage has a fixed rate for the first three years. In the adjustable-rate period following, the interest rate changes once per year. Learn more.
- 5/1 ARM. The fixed-rate period for this ARM lasts five years. Rate changes then occur once every year. Learn more.
- 10/1 ARM. You guessed it: after 10 years at a fixed rate, this ARM’s interest rate adjusts yearly. Learn more.
Each entry in the preceding list links to an article where you can learn more about that type of ARM. To learn more about ARMs in general, follow this link.
Second mortgage: Home equity loan or home equity line of credit (HELOC)
The second mortgage in your 80-10-10 deal will be either a home equity loan or home equity line of credit (HELOC). These two standard ways of drawing equity out your home are here used to draw out what amounts to an advance on your equity. Though space does not permit going into details about these loans here, you can learn a lot about them by reading our article Home Equity Loan vs. Line of Credit: Which Should You Choose?.
80-10-10 mortgage alternatives
Before committing to an 80-10-10 loan with its second-mortgage piggyback loan, compare the 80-10-10 deal to viable alternatives.
Save up the 20% down payment before buying a home
The first and most obvious alternative is to save a little longer so you can afford the traditional 20% down. In a market where real estate prices are rising rapidly and mortgage rates seem poised to go up, this approach sounds counterintuitive, possibly daft. But a prudent home buyer should know all the options before making a decision.
Apply for down payment assistance
If you need help with your down payment, there are a lot of options to investigate beyond 80-10-10 loans. Federal, state, and local governments, as well as nonprofits, have down payment assistance programs. If you qualify, one of these could be a better deal for you than an 80-10-10 mortgage.
Learn more about down payment assistance programs.
Get a nonconventional loan
One way to avoid paying for private mortgage insurance is to get a loan offered or insured by a public entity. You only have to pay PMI on conventional loans, and conventional loans are those neither offered nor insured by the government.
So, if you want a nonconventional loan, what are your options? FHA, VA, and USDA loans are three types of subsidized loans worth considering. Note that some of these agencies’ programs may include down payment assistance.
These loans, insured by the Federal Housing Administration, are easier to qualify for than conventional loans like 80-10-10 mortgages. If you can pay 10% down, you may qualify with a credit score as low as 500. If you can only manage 3.5% down, you may need a credit score around 580.
The U.S. Department of Veterans Affairs guarantees these mortgages. Certain members of the military, veterans, and eligible family members can get them. Aside from military ties, their requirements closely resemble those for FHA loans. VA loans also resemble FHA loans in being easier to qualify for than conventional loans like the 80-10-10.
The U.S. Department of Agriculture has several housing programs. USDA loans are available to lower-income homebuyers in qualified rural areas. They have flexible credit-score requirements. Because they permit borrowers to buy homes without a down payment, USDA loans could be a great match for borrowers considering an 80-10-10 loan to reduce their down payment.
The following lenders all support FHA, VA, and USDA loan programs.
- With an 80-10-10 mortgage, you can pay less than 20% down for conventional financing yet avoid having to pay for private mortgage insurance (PMI).
- An 80-10-10 loan means taking out both a first and second mortgage when you purchase your home. This means you’ll have two mortgage payments every month.
- The first mortgage covers 80% of the home price and is usually a fixed-rate mortgage. It can be an adjustable-rate mortgage (ARM), but this is less common.
- The second mortgage covers 10% of the home price and replaces half of the traditional down payment. This mortgage can be either a home equity loan or a home equity line of credit (HELOC), usually with a variable interest rate.
- Borrowers must weigh the PMI savings against added fees and interest. They should also consider the financial burden of having to cover two monthly mortgage payments rather than one.
- Alternatives to 80-10-10 mortgages include delaying your home purchase until you can afford a 20% down payment, finding other down payment assistance, and seeking nonconventional financing. Nonconventional financing worth considering includes FHA, VA, and USDA loans.
View Article Sources
- About Publication 936, Home Mortgage Interest Deduction — IRS
- Let FHA Loans Help You — U.S. Department of Housing and Urban Development (HUD)
- Title 26 Subtitle A Subchapter B Part VI §163 Interest — U.S. Code
- VA Home Loans — U.S. Department of Veterans Affairs
- What kind of down payment do I need?… — Consumer Financial Protection Bureau (CFPB)
- What is private mortgage insurance? — CFPB
- Why Is 20% Ideal for a Down Payment?
Traditional 80-20 mortgages are alive and well. Some industry experts even consider them ideal.
- Additional articles linked to in the post — SuperMoney
To conserve space, only certain SuperMoney articles are listed here. You can discover several more by following links in the article above.
- Best HELOC Lenders — SuperMoney
- Best Mortgage Refinance Lenders — SuperMoney
- How to Avoid Paying PMI (Private Mortgage Insurance)? — SuperMoney
- Best Mortgage Lenders — SuperMoney
- How To Lower Your Monthly Mortgage Payment — SuperMoney
Before becoming an editor and writer for SuperMoney, David thought he’d be an academic. He now applies research skills learned from his advanced degrees, and behavioral insights gained from his background in psychology, to personal finance. He has acquired expertise in real estate and enjoys helping readers make better saving, spending, and investing decisions. Though he does most of his work in the background, you will find his name on articles from time to time.