What it means
US lenders normally require PMI when the down payment on a conventional loan is under 20%. The insurance protects the lender, but the borrower pays the premium, often for years.
An 80-10-10 sidesteps it by splitting the borrowing. The first mortgage sits at exactly 80% of the price, so no PMI is required on it, and a smaller second mortgage (often a home equity loan or line of credit) fills most of the gap left by the buyer's cash.
The second loan is riskier for its lender because it ranks behind the first if the borrower defaults. It therefore carries a higher rate and often a shorter term or a variable rate (one that moves with market rates).
The number to compare is the blended cost of both loans against one larger loan plus insurance. The risks are real.
Two loans mean two sets of terms and two payments, and the rate on the second can rise. Refinancing later is also more complicated, because a new first lender usually needs the second lender to agree to stay in second place, a step called subordination.
The structure grew popular before the 2008 financial crisis, faded when lending tightened, and tends to return whenever insurance premiums or interest rates make the trade-off attractive. In a downturn, a buyer who put little down can quickly owe more than the home is worth.
For the disciplined buyer the maths can work: if the second loan's extra interest over its short life costs less than years of PMI, the structure saves money and builds equity faster. Run the comparison honestly, including rate resets, fees on both loans and the point at which PMI on a single loan would have been cancelled.
Tax treatment depends on the rules in force, so confirm with an adviser before counting on any deduction.
In practice
Real-world examples.
Example
A buyer with 10% down and strong credit takes an 80-10-10. Her combined payments run slightly below the alternative of one loan plus monthly PMI, and she plans to clear the second loan within five years.
Example
Another buyer chooses a single 90% loan with PMI instead. His payment is higher, but when rates fall he refinances one loan in one step while a neighbour with two loans must negotiate with two lenders.
Example
A buyer in 2006 took an 80-10-10 with a variable-rate second loan. When prices fell and the second loan's rate reset upward, she owed more than the home was worth and the second lender moved first towards foreclosure.
Formula
Calculation
Compare monthly cost: first loan payment + second loan payment, against single loan payment + monthly PMI.
Worked example (illustrative rates): a buyer purchases a $500,000 home with $50,000 down, which is 10%.
Option A, the 80-10-10: a first loan of $400,000 (80%) at 6.5% over 30 years has a payment of about $2,528 per month. A second loan of $50,000 (10%) at 8.5% over 15 years has a payment of about $492 per month. Total: $2,528 + $492 = $3,020 per month.
Option B, one 90% loan: $450,000 at 6.5% over 30 years has a payment of about $2,844 per month. PMI at an assumed 0.6% a year: $450,000 x 0.6% = $2,700 per year, and $2,700 / 12 = $225 per month. Total: $2,844 + $225 = $3,069 per month.
Difference: $3,069 - $3,020 = $49 per month in favour of Option A.
The gap is small and the comparison is rough. Option A's payment includes faster repayment of the second loan, but its rate can reset upward and PMI under Option B would eventually be cancelled.Case study
Seen in the real world.
This case study is fictional and illustrative. Priya, an invented product manager, buys a $500,000 home with $50,000 down. She chooses an 80-10-10 because she receives a $12,000 bonus each year and plans to direct every bonus at the higher-rate second loan.
Before she signs, her lender confirms that the second loan has no prepayment penalty, and she compares the blended cost of both loans against the insured single-loan quote she was offered. By paying the bonuses against the second loan she clears it in about four years, after which she holds one low-rate mortgage and has never paid a PMI premium. She notes in her records that the plan depended on her bonuses actually arriving, and that she kept an emergency fund in case they did not.
Watch out
Common mistakes.
- Comparing only day-one payments. The second loan's variable rate and shorter term can reverse the result within a few years.
- Forgetting subordination. Refinancing the first loan later needs the second lender's cooperation, which is neither free nor guaranteed.
- Assuming the avoided insurance is pure saving. The second loan is priced for its risk, so count the total interest and fees, not just the premium that vanished.
Questions
People also ask.
Is an 80-10-10 still available?
Some banks and credit unions offer it, though lending standards are tighter than before 2008 and strong credit and verified income are typically required.
Why exactly 80%?
On conventional US loans, 80% of the price is the loan-to-value level at which lenders usually stop requiring PMI, so keeping the first loan there removes the premium.
Can the second loan be paid off early?
Usually yes, and doing so quickly is the classic strategy, but check for prepayment penalties before signing.
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