80 20 Loans- What Are Their Disadvantages?
Most people are aware of the advantages of 80 20 loans. These include the ability to avoid a down payment and able to qualify more easily than with a standard conventional loan. However, far less are aware of their disadvantages. Here, we will take a look at some of the more common ones.
Disadvantages Of 80 20 Loans
1. Will not have equity growing on the house.
With 100% financing, you are hurting your opportunity to benefit from equity growth in the home until the loans are paid off. Since most people consider using the equity in their home later or see it is part of the benefits of home ownership, this should give you some pause before going forward with this type of loan.
2. Rates will be higher on two combined loans rather than one.
Although the first lender will likely have a fairly standard interest rate, the second lender will want to get
a higher interest rate on the 20% loan. This is because they are assuming more risk and will want to justify this with the higher interest rate. If the loan defaults, they will be in a secondary position behind the first loan which causes them to have more risk than the first loan position.
3. Potential for balloon payment at the end.
Many of these types of loans will have a big balloon payment at the end of the loan so it is important to check and see if this is the case with your planned loan. If a balloon payment exists, this requires more planning on the part of the borrower so they are not surprised at the end of the loan.
By keeping these different disadvantages in mind, you should have a better understanding of 80 20 loans. Knowing the pros and cons for this type of piggyback loan is important to make sure to see if this loan is right for you.