28th Oct 2009 by JonB
80/20 financing refers to a certain way to finance 100% of a property. Typically, loans that cover more than 80% of the property's worth will be subject to private mortgage insurance, or PMI.
PMI is insurance for the lender in case you default on your loan. It can be expensive, which is why the 80/20 concept has become so ubiquitous.
Instead of having 1 loan for 100% of the property, which would be subject to PMI. The 100% financing is broken up into 2 different loans. A first mortgage for 80% of the property's worth and a second mortgage for the remaining 20%.
For example, financing on a house being purchased for $100,000 would have a first mortgage of $80,000 and a second mortgage of $20,000.
80/20 financing can be convenient. But keep in mind that each loan is going to be subject to a different rate. The first mortgage will have a lower rate than the second mortgage which will have a much higher rate. To compare different financing options you will want to calculate the blended rate of the two loans.
To do this, simply take each loan amount and multiply it by it's interest rate. Then add those two rates together and divide that figure by the total loan amount.
For example: for a $100,000 purchase you may be offered an 80% loan at 6% and a 20% loan at 8%.
($80,000x 0.06% + $20,000X0.08%) / $100,000= a blended rate of 6.4%
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