Also referred to as a “tandem” loan, an 80-20 mortgage involves taking out two loans to pay for the entire cost of a home. The first mortgage consists of eighty percent of the purchase price, while the 2nd loan pays for the twenty percent which would more typically be paid for with a down payment. The only up-front expenses are the closing costs.

An 80-20 mortgage is most attractive for someone who doesn’t have the money for a down payment, or desires to use these funds for a different purpose. It can provide a more realistic option for first-time buyers, as they do not have funds from the sale of a previous home. Another advantage of an 80/20 mortgage is that private mortgage insurance (PMI) usually isn’t needed.

A major downside of using this type of loan is the higher cost in total interest. With a thirty year term and six percent interest, it would cost a total of $664,714 to purchase a $345,000 home with a twenty-percent down payment. On the other hand, the total expense would be $744,642 with an 80-20 mortgage, almost eighty thousand dollars more. The actual cost may be greater; as bankrate.com points out, an increased interest rate often applies to the 20% loan.

Another disadvantage of an 80-20 loan is the lack of home equity it produces. Until a significant amount of the principal has been paid off, the owner will not be able to take advantage of home equity loans, equity credit lines, or reverse mortgages. If the home is sold, both loans will have to be paid back and it will be difficult to purchase a different property without using another 80-20 mortgage.

There is a greater possibility for negative equity with 80-20 mortgages, as the home’s value only has to fall slightly for this to happen during the first years of ownership. It should be verified that the home is worth at least as much as the purchase price; otherwise, a mortgage of this type could begin with negative equity.

Overall, an 80-20 mortgage offers a more convenient alternative for home buyers who cannot afford to make a down payment and don’t want to delay purchasing a property. However, in the long run, it is often less financially advantageous than making a down payment on a traditional loan. Lending institutions which offer 80-20 mortgages include Citizens Bank, National Penn Bank, and various local banks.