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80-10-10 Mortgages
This type of loan structure is a good way to avoid PMI (Private Mortgage Insurance) and increase your tax break. Let's take a home purchase with a 10% down payment and a 90% loan (this loan would require PMI, as would any loan with less than 20% down payment).
| Sales price 500,000 90% loan = 450,000 down payment = 50,000 6.0% interest rate | |
|---|---|
| P&I (Principal & Interest payment) | 2700 |
| Taxes (estimated) | 400 |
| Homeowners Insurance | 100 |
| PMI (Private Mortgage Insurance) | 195 |
| TOTAL PAYMENT | 3395 |
| Tax Break (estimated) | 725 |
| Net Payment per month (after the tax break) | 2670 |
Below, let's compare it to the same home purchase with 10% down, but now we'll use a 10% 2nd trust and then an 80% 1st trust, otherwise known as an '80-10-10'.
| Sales price 500,000 80% loan = 400,000 10% 2nd trust loan = 50,000 down payment = 50,000 6.0% interest rate on 1st trust 7.75% interest rate on 2nd trust | |
|---|---|
| P&I on 1st trust (Principal & Interest payment) | 2400 |
| P&I on 2nd trust (Principal & Interest payment) | 358 |
| Taxes (estimated) | 400 |
| Homeowners Insurance | 100 |
| PMI (Private Mortgage Insurance) | 0 |
| TOTAL PAYMENT | 3258 |
| Tax Break (estimated) | 715 |
| Net Payment per month (after the tax break) | 2543 |
There is approximately a $130/month advantage in doing the 80-10-10, even though the 2nd trust has a higher interest rate. You are much better off with an 80-10-10 loan than doing a 10% down loan with PMI. The results are even more pronounced on a 5% down '80-15-5' loan versus a 95% loan with PMI.