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“80/10/10” vs. Conventional Loan With PMI; Pros and Cons

A buyer looking into a $675,000 purchase contacted us over the weekend. He had enough funds for a 10% down payment, and he wanted to compare programs.

Our “80/10/10” program, an 80% loan-to-value (LTV) first mortgage, with 10% down, and a 10% LTV 2nd mortgage (HELOC) seemed like the obvious “winner.” Our estimated PITI for our $675,000 purchase was approximately $3,850 per month (for a no points loan in the 4.625% range).

Our estimated PITI+PMI for a 90% LTV purchase was over $400 HIGHER than the 80/10/10 scenario. Our total estimated was PITI+PMI was $4,270 per month (for a no points loan in the 4.625% range).

There are, however, drawbacks to the 80/10/10 program: (1) they take slightly longer to close, and this can be deadly in a competitive-bid situation; (2) the 2nd mortgage is “interest only” and adjustable; when rates go up or when borrowers want to amortize the loan, the payment will go up; (3) 2nd mortgage underwriting guidelines are much tighter from both an income and credit perspective; and (4) our appraisal must pass muster before two different underwriters (for first and 2nd mortgage).

Borrowers in need of a lightning-fast close should opt for the straight 90% LTV loan. This is not all bad, as such borrowers can eliminate PMI in a variety of ways and then have only a fixed rate mortgage with no PMI. We will discuss how to eliminate PMI again in future Comments.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646