What is the 80 10 10 rule finance?

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By Nick

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Looking to buy a home but don’t have a 20% down payment? The 80-10-10 rule may be the solution for you. By taking out a primary mortgage for 80% of the purchase price, making a 10% down payment, and then taking out a second mortgage for the remaining 10%, you can avoid the cost of private mortgage insurance (PMI). However, there are drawbacks to consider, such as having two separate mortgage payments and potentially higher interest rates on the second mortgage.

What is the 80 10 10 rule finance?

The 80 10 10 rule finance is a type of mortgage that allows you to avoid paying for private mortgage insurance (PMI) even if you don’t have a 20% down payment. Instead, you take out a primary mortgage for 80% of the purchase price, make a 10% down payment, and then take out a second mortgage for the remaining 10%.

How does the 80 10 10 rule finance work?

Let’s say you want to buy a house that costs $500,000, but you only have $50,000 saved up for a down payment. With a traditional mortgage, you would need to put down 20% of the purchase price, or $100,000, to avoid paying for PMI.

However, with the 80 10 10 rule finance, you can avoid PMI by taking out a primary mortgage for $400,000 (80% of the purchase price), making a $50,000 down payment (10% of the purchase price), and then taking out a second mortgage for $50,000 (the remaining 10%).

What are the benefits of the 80 10 10 rule finance?

The main benefit of the 80 10 10 rule finance is that it allows you to avoid paying for PMI, which can save you thousands of dollars over the life of your mortgage. PMI is typically required if you have less than a 20% down payment, and it can add hundreds of dollars to your monthly mortgage payment.

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Additionally, the 80 10 10 rule finance can help you qualify for a larger mortgage than you might otherwise be able to afford. By spreading the cost of the purchase price over two mortgages, you can lower your monthly payments and potentially qualify for a larger loan.

What are the drawbacks of the 80 10 10 rule finance?

One potential drawback of the 80 10 10 rule finance is that you will have two separate mortgage payments to make each month. This can be more complicated than having a single mortgage payment, and it can be harder to keep track of your finances.

Additionally, the interest rates on the second mortgage may be higher than the interest rate on the primary mortgage, which can increase your overall borrowing costs.

In conclusion

The 80 10 10 rule finance can be a great option for homebuyers who don’t have a 20% down payment but want to avoid paying for PMI. By taking out a primary mortgage for 80% of the purchase price and a second mortgage for another 10%, while making a 10% down payment, you can save money and potentially qualify for a larger mortgage. However, it’s important to consider the drawbacks of this type of mortgage, such as having two separate mortgage payments and potentially higher interest rates on the second mortgage. As with any financial decision, it’s important to weigh the pros and cons and make an informed choice based on your individual circumstances.

References for « What is the 80 10 10 Rule Finance? »

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