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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127472  
Subject: Re: 80/10/10 Mortgages Date: 3/13/2001 9:34 PM
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Hi ep1028,
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DISCLAIMER: I am a friendly mortgage broker with a bad attitude aginst lousy service providers!
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80/10/10 and their cousin combination mortgages are common currently, as they allow a home buyer to finance as much of the purchase as possible at the lowest possible trouble and costs.

The numbers refer to the "Loan To Value" (LTV), and the 80 represents your 1st mortgage. Fannie Mae and Freddie Mac, (the two companies that 'buy' loans from the banks so the banks can recycle their money), insist that any loan greater than 80% LTV has Private Mortgage Insurance on it (to protect them, Freddie and Fannie, from the higher statistical rate of default on higher LTV loans.)

Therefore, if you were to take a large, SINGLE purchase loan for, say, 90% of the purchase price, and pay 10% cash as a down payment, you would have your entire 1st loan at a single, low rate, BUT have a rate of insurance applied to the entire amount of money.

In the 'combination loans' you borrow less than the 80% mark on the first loan, therefore the lenders don't have to add PMI.

The next number (10, in this case), represents a second mortgage or a Home Equity Line Of Credit (HELOC). Obviously this 2nd loan is far less than 80% of the value, so PMI is not an issue... but it comes 2nd in line of repayment should there ever be a default in payments, so the lenders consider it riskier, and charge a higher interest rate.

STILL... even when you look at the higher interest paid for the smaller amount of money (10% in this case), it usually adds up to be less out-of-pocket than the additional costs of PMI. In addition, the interest (which is lower, remember) is tax deductible, where the additional costs of PMI (which is NOT interest, but an insurance premium) is NOT tax deductible.

The LAST number (again, 10 in this case) represents the balance of the purchase price. It *MAY* be a down payment... and/or a 3rd loan! Why would anyone take a 3rd loan? you may ask... Well, how many folks do you know who would like to become a homeowner with no down payment? Stupid question, right?

The 3rd loan may either be provided by a lender, by the seller of the home itself (so they get tax advantages and additional interest income), or may be provided as a gift by non-profit organizations that specialize in that, or a fmaily member.

There are LOTS of different ways to combine these options. Each possibility has different advantages and disadvantages... and it all depends on your own situation and preferences.

These days just about anyone with good credit COULD buy a home with no down payment with standard financing IF THEY CHOSE TO! Being creative with the seller is an even better idea!

Hope that helps! If I can be of more specific help, let me know!
Dave Donhoff
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