80/15/5 Mortgage

Mortgage brokers sometimes speak of an 80/15/5 mortgage, but what is it exactly? In just a moment, I am going to show you exactly what it is, and how you can use it as a tool to leverage your money buying a home, or investing in real estate. There are many folks out there that do not have the appropriate cash to put down 20% on a home to get a conventional mortgage. This created a situation for potential home buyers, and thus the mortgage industry was created.

In recent years, mortgage companies had relaxed their criteria for lending money, and were granting no money down loans to people with bad credit, who had no business owning a home. These were sub-prime loans and carried too much interest expense for the buyer. So recently, there have been many foreclosures and mortgage companies along with banks have been tightening their policies on lending. In short, they want to see some money down before lending. However, with an 80/15/5 mortgage, you can setup a loan at prime rates with only 5% down.

Many mortgage companies even today will lend a straight 95% loan to buyer. So why hassle with the 80/15/5 mortgage? Because by getting two mortgages from the lender, you are able to avoid paying Private Mortgage Insurance (PMI), and you have to opportunity to select a shorter payoff on the second loan. The 15% second mortgage has a much smaller balance than the first mortgage of 80%, and the repayment period can be set to anywhere between 5 and 20 years, typically. So this means that you could select a 5 year payoff on the second mortgage, and your total mortgage payment will decline sharply after the first 5 years of payments. So to sum up, you would save the PMI payment, and in 5 years have a much lower total monthly payment. Let’s look at a quick example:

80/15/5 Mortgage Example
   
Sales Price $85,000.00
First Mortgage 80% of Sales Price $68,000.00
Second Mortgage 15% of Sales Price $12,750.00
Cash Down Payment 5% of Sales Price $4,250.00
   
* PMT on First Mortgage @ 7% APR for 30 Years $452.41
* PMT on Second Mortgage @ 7% APR for 5 Years $252.47
* Total Monthly Payment $704.87
   
* Single Mortgage of 95% of Sales Price, 7% APR for 30 Years $537.23
   
* Payment Difference $167.64
   
* Principle and Interest  
   
   

Now these payment figures do not include taxes and home owner’s insurance, but as you can see, the difference in the payment between an 80/15/5 mortgage and a 95% mortgage is $167.64. Now bear in mind, the 95% mortgage requires PMI, which was not included in this calculation. So if the PMI was say, $35 per month, then the payment difference would go down to $132.64. So after 5 years, the second mortgage would be paid off, and the payment would go down to $452.41 per month. This is the benefit of the 80/15/5 mortgage. On the short term, you are able to bypass PMI, and down the road, you will be able to cut your mortgage payment. Sound good?

Now if the lender does not want to approve the 80/15/5 mortgage, there is another option you can explore. When making your offer to the seller, have him give you a second mortgage to cover the 15%, and you can achieve the same result. You may have to pay a little more in interest on the second mortgage, depending on your negotiating skills, but in the long run, you stand to save a lot of money, without much of a difference in payment at the start.

Creative finance in real estate investing is very necessary if you are looking to get into properties with little or no money down. The 80/15/5 mortgage is just one way to obtain a new property without putting much money down. Questions? Comments? Leave them below in the comment area, and I will answer them ASAP. You may download the xls spreadsheet here:

80/15/5 Mortgage Example.xls

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There are a number of cheap loans available in all banks. Getting such banking loans can be the ideal way to raise capital for a home business. Perhaps starting from a loan is not an ideal beginning, but such fast equity loans had evolved for this purpose basically.

4 thoughts on “80/15/5 Mortgage

  1. Pingback: Mortgage » 80/15/5 Mortgage

  2. Pingback: mortgage » 80/15/5 Mortgage

  3. i am a novice investor and i wanted to know Can you do80 / 15 / 5 type of financing with a commercial mortgage. i am looking at a 5 unit building. the price is 245 k.

  4. Rob:

    It would seem logical. But the only way to be sure is to talk to some banks about doing this type of commercial loan.

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