Buying a home without a significant down payment can be challenging due to lender requirements and extra costs like private mortgage insurance (PMI). The 80/20 mortgage strategy offers a solution by splitting the total financing into two loans, helping buyers avoid PMI and move into a home sooner.
Understanding Private Mortgage Insurance (PMI)
When you make a down payment under 20% with a conventional loan, lenders typically require PMI to protect themselves against default risk. This additional monthly cost increases your total housing expenses without building your home equity. Avoiding PMI is a key motivation behind the 80/20 loan setup. For more on PMI, see our article on Private Mortgage Insurance (PMI).
How the 80/20 Mortgage Structure Works
In this strategy:
- The first mortgage covers 80% of the home’s purchase price, avoiding PMI because it meets lenders’ typical threshold for avoiding mortgage insurance.
- The second loan, often called a piggyback loan, covers the remaining 20%. This second loan can be a fixed-rate Home Equity Loan or a variable-rate Home Equity Line of Credit (HELOC). Learn more about these options at Home Equity Loan Interest Deduction and Home Equity Line of Credit (HELOC).
Example: For a $400,000 home purchase with no down payment:
- First mortgage (80%): $320,000
- Second loan (20%): $80,000
- Total financing: $400,000
- PMI: $0
Instead of one mortgage payment plus PMI, you’ll manage two loan payments. A common variant is the 80/10/10 loan, where you put down 10% cash and use two loans for 80% and 10% respectively. Our related article 80/10/10 Loan explains this option in detail.
Pros and Cons of the 80/20 Mortgage Strategy
| Pros | Cons |
|---|---|
| Avoids PMI, reducing monthly payments | Two sets of closing costs and possibly higher upfront fees |
| Potential tax deductions on interest paid | Variable rate risk if the second loan is a HELOC |
| Enables buying sooner without waiting for a large down payment | Managing payments to two lenders can be complex |
| Can help bypass jumbo loan restrictions | Stricter qualification standards, including high credit scores |
Who Should Consider an 80/20 Mortgage?
The strategy suits buyers who have good credit, steady income, and limited cash for a large down payment but can afford two loan payments. It’s particularly helpful in high-cost markets where saving a 20% down payment is difficult. Always compare costs carefully, as paying PMI for a few years may sometimes be simpler or cheaper.
Tax Deductibility
Interest on both loans is generally tax-deductible if used to buy or substantially improve your home, under IRS rules on mortgage interest (see IRS Publication 936: Home Mortgage Interest Deduction). Consult a tax professional for personalized advice.
The 80/20 mortgage strategy was common before the 2008 financial crisis but became less popular due to tighter lending standards. It has since made a cautious comeback under stricter qualifications.
Use this approach wisely as part of a careful home financing plan and consult mortgage professionals to evaluate your options.
