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80/20 Mortgage Loans To Save On Mortgage Insurance

by: Dwitts
Total views: 38 | Word Count: 520

You are probably well aware that unless you provide a down payment for your mortgage loan of at least 20% of the property’s value, you will have to pay each month PRI which stands for Private Mortgage Insurance. This means that anything above 80% of financing will cost you significantly more. However, with 80/20 mortgage loans you can save on mortgage insurance.

80/20 mortgage loans are actually two loans in one. The first one being the actual mortgage loan that will finance the 80% of the property’s value thus not requiring private mortgage insurance and the other one will provide funds equivalent to 20% of the property’s value in the form of a second mortgage or home equity loan.

Avoiding Payment Of Private Mortgage Insurance (PMI)

These loans or combination of loans solve a problem that turned 100% financing mortgage loans into a really heavy burden. Any loan that finances above 80% of the value of a property needs to include private mortgage insurance in order to cover for the repayment of the loan if anything happens. Thus, this combination of loans provides 100% financing without the need of Private Mortgage Insurance.

Private mortgage insurance is not required because the actual mortgage only finances 80% of the value of the property. The rest of the asset’s value is financed with a second mortgage or home equity loan that cover’s for the remaining 20% without the need of Private mortgage insurance either.

Private Mortgage Insurance

Private mortgage insurance protects the lender against any loss in the event of default on the mortgage loan. The insurance is similar to government agencies insurances like FHA with the sole difference that it is meant for private mortgages only. The premium is paid by the borrower and is usually included on the mortgage’s monthly payments.

Usually this extra charge can be bypassed by offering a substantial down payment and thus not requiring more than 80% of the funds needed to purchase the property that is used as collateral for the loan. That is why most applicants try to raise at least 20% of the value of the property in order to avoid having to pay the private mortgage insurance premium that is rather expensive.

A Matter Of Costs

Nothing comes for free and obtaining the additional financing through 80/20 mortgage loans is not the exception. The home equity loan that grants the funds needed for the 20% down payment comes with higher interest rates, a shorter repayment program and generally less advantageous terms than the home loan. This is due to the fact that even that home equity loans are secured loans, there is a greater risk of defaulting on a home equity loan than on a home loan.

However, when comparing the costs of private mortgage insurance and the additional amount that you will have to pay for the home equity loan, you will understand why these loans are becoming so popular. Even with the additional costs that they represent, you will still save a lot of money by not having to pay the private mortgage insurance premiums every month through the whole life of the loan.

About the Author

Devora Witts is a certified loan consultant with several years of experience in the credit area who instructs people regarding credit recovery and approval for personal loans, home loans, consolidation loans, car loans, student loans, unsecured loans and many other types of loans. If you want to understand Instant Unsecured Loans and Bad Credit Easy Loans thoroughly you can visit her site http://www.badcreditloanservices.com. If the link doesn't work, just copy and paste www.badcreditloanservices.com in your browser’s address bar.

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