Quick Peek:
Looking to avoid the costly private mortgage insurance (PMI) but don’t have a 20% down payment? The 80-10-10 loan strategy might be the solution. With this approach, you take out a primary mortgage for 80% of the purchase price, a second mortgage for 10%, and make a 10% down payment. By doing so, you can avoid PMI, which can save you thousands of dollars each year. However, this strategy can be more complex and expensive in the long run.
What is the 80 10 10 rule finance?
Previously in the article, we discussed the 80 10 10 rule finance, which is a popular financing strategy for those who want to avoid the cost of private mortgage insurance (PMI). This rule involves taking out a primary mortgage for 80% of the purchase price, a second mortgage for another 10%, while making a 10% down payment. This strategy is beneficial for those who don’t have a 20% down payment, as it allows them to avoid the cost of PMI.
How does it work?
Let’s say you want to buy a house that costs $500,000, but you only have $50,000 for a down payment. Without the 80 10 10 rule finance, you would need to take out a mortgage for $450,000, which is 90% of the purchase price. This means you would have to pay for PMI, which can cost you thousands of dollars each year.
With the 80 10 10 rule finance, you would take out a primary mortgage for $400,000, which is 80% of the purchase price. You would then take out a second mortgage for $50,000, which is 10% of the purchase price. Finally, you would make a down payment of $50,000, which is the remaining 10% of the purchase price.
What are the benefits?
The main benefit of the 80 10 10 rule finance is that it allows you to avoid the cost of PMI. PMI is typically required if you don’t have a 20% down payment, and it can add thousands of dollars to your mortgage each year. By using the 80 10 10 rule finance, you can save money on PMI and use that money for other expenses.
Another benefit of the 80 10 10 rule finance is that it can help you qualify for a larger mortgage. Lenders typically prefer borrowers who have a larger down payment, as it shows that they are financially responsible. By using the 80 10 10 rule finance, you can make a smaller down payment while still showing lenders that you are financially responsible.
What are the drawbacks?
The main drawback of the 80 10 10 rule finance is that it can be more complicated than a traditional mortgage. You will need to take out two mortgages instead of one, which can be confusing for some borrowers. Additionally, you will need to make two separate payments each month, which can be difficult to manage.
Another drawback of the 80 10 10 rule finance is that it can be more expensive in the long run. While you will save money on PMI, you will need to pay interest on both mortgages. This can add up over time, and you may end up paying more in interest than you would have with a traditional mortgage.
In conclusion
Overall, the 80 10 10 rule finance is a popular financing strategy for those who want to avoid the cost of PMI. While it can be more complicated and more expensive in the long run, it can also help you qualify for a larger mortgage and save money on PMI. If you are considering using the 80 10 10 rule finance, it’s important to weigh the benefits and drawbacks carefully and consult with a financial advisor before making a decision.
References for What is the 80 10 10 rule finance?
- Dave Ramsey – The 80/10/10 Budgeting Rule
- The Balance – The 80/10/10 Rule for Retirement Savings
- Investopedia – 80-10-10 Rule
- Forbes – The 80/10/10 Rule: What It Is And How To Use It For Investing
- NerdWallet – The 80/10/10 Rule: Investing for Beginners
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