Financing From the Bank

80 20 mortgages are those in which eighty percent of the sale price of the home is financed by the bank, with the remaining portion being paid by the new property owner. For many lenders and borrowers, this arrangement is deemed to be the most appropriate and financially conservative arrangement that can be made.

Twenty Percent of the Sales Price

With these types of mortgages, the new property owner has to come up with twenty percent of the sale price. For many new homeowners, this is difficult or impossible to do. As such, when banks require a twenty percent down payment, they are effectively ruling out certain potential homeowners. However, these are the homeowners who couldn’t come up with the twenty percent, and so are the larger credit risk. As a bank benefits by lending to customers who obtain an eighty twenty mortgage over a less strict mortgage down payment amount through lower default risk, the new home owner will also benefit by having lower monthly mortgage payments as well as through lower mortgage rates. Banks often offer these beneficial rates to those that put down a twenty percent down payment.

Another item to consider is PMI, which stands for private mortgage insurance. A bank that finances a borrower for more than eighty percent often requires the borrower to pay PMI. This is generally calculated at 1% of the outstanding mortgage. As such, this represents an additional fee that is owed each month by the homeowner until twenty percent of the mortgage is paid off. Do you see how important 80 20 mortgages are for both lenders and borrowers.

Five Times Income Rule

Homeowners often go by the five times income rule. In that they should not spend more than five times their income on a home, anticipating that their income will grow and make the payments smaller and smaller as time goes on due to raises and inflation. The importance of this calculation is based upon the anticipation that you would have one of those 80 20 mortgages as they are the most common type. As such, these mortgages have the additional benefit of being the benchmark upon which lenders and borrowers evaluate loans.

Selecting an 80 20 mortgage should be considered as it is the benchmark on which home loans are evaluated for credit quality, due to lower interest rates paid on these loans, due to the elimination of PMI, and because it is fiscally conservative.