On Real Estate: How to refinance an 80/20 combo loan

July 7, 2010

By Jim Hagerty
Staff Writer

An 80/20 is a 100-percent financing program composed of a first mortgage (80 percent) and a second, which covers the remaining 20 percent of the purchase price. Borrowers take advantage of 80/20 programs to avoid producing a down payment private mortgage insurance (PMI).

While 80/20s are popular and suitable methods of purchasing a home, it is often wise to consolidate the two loans to eliminate interest and payments on the second.

→ Determine your equity position. Chances are, it may be a year, possibly two or three, before your home appreciates enough, allowing you to consolidate your first and second mortgage. You must, therefore, know where you stand before proceeding with an application. Depending on real estate trends, residential real estate commonly appreciates approximately 3 percent each year. For example, if you purchased your home three years ago for $135,000, today, in a stable market, it’s likely worth $146,000 or $147,000. If you purchased with an 80/20, and you owe $134,000 today, 88 percent of your equity is secured by mortgages.

→ Familiarize yourself with conventional Loan to Value (LTV) guidelines. The majority of lenders making conventional first mortgages (backed by Freddie Mac and Fannie Mae) typically only make loans for 97 percent of a home’s value. Some lenders will lend up to 100 percent on a first mortgage (owner-occupied property).

→ Apply for a conventional first mortgage. Gather your W-2s from the last year’s (tax returns, if you’re self-employed), two most-recent bank statements or any statements from retirement or investment accounts. Meet with a lender and complete a mortgage application package. You will also be required to have your home appraised. A home appraisal will cost you $250 to $500.

From the July 7-13, 2010 issue

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