How Does an 80-10-10 Mortgage Loan Work?

Reader Question: What is an 80-10-10 mortgage loan, and how does it work?

It's a fairly common way to buy a home these days, especially when the buyer does not have a full 20% down payment. Basically, these three numbers represent percentages of a whole. The first number, 80%, represents the primary loan the home buyer gets to pay for the home. The second number, 10%, represents a second loan -- often referred to as a piggyback loan -- that is also used to pay for the home. The last number, another 10%, represents a down payment the home buyer makes when purchasing a home.

This is a way to buy a home without having to pay for private mortgage insurance, or PMI. When you take out a home loan for more than 80% of the home's value, you have to pay for private mortgage insurance or PMI. This can increase the size of your monthly payment, which is obviously something you want to avoid.

Another common financing option is the 80-15-5 mortgage loan. This works in much the same way, except the home buyer is only putting down 5% on the purchase price of the home.

Typically, the second or "piggyback" loan will have a higher interest rate than the primary mortgage loan. This is why people often try to roll the second into the first as soon as they have enough equity built up in the home.

So you can think of and 80-10-10 mortgage loan as a financing tool that allows home buyers to pay less than 20% down, while avoiding private mortgage insurance in the process.