80-10-10 vs 30y fixed mortgage

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MAGenomix
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80-10-10 vs 30y fixed mortgage

Post by MAGenomix »

We just had an offer accepted on a house and are trying to choose between what we think are two good options for financing:

1. 30y fixed 10 % down physician loan at 3 % (option to go as low as 5 down) with one provider (no PMI)

2. 80-10-10 purchase first money second option with 10 % down, 80 % as 30 yr fixed at 2.75 % (with points although they're pretty cheap- I calculated a 4 yr breakeven) and a 10 pc HELOC at prime + 1.24 pc. HELOC is interest only for first 10y though we would aim to aggressively pay down the principle (aiming to knock it out in 3-4 years). No PMI here either.

Monthlies for both are well within affordable (less than 20 pc of gross income). The first option seems simpler (and not floating on rates which will almost certainly go up) and because they do as little as 5 down, there seems to be less risk if appraisal comes in low. On the other hand, the 2nd option allows us to lower our monthly by aggressively paying down the HELOC (and for the excess we'd pay into the monthlies to remain liquid). Also having modeled out the impact of rising rates on monthly payment for the HELOC, the rates could go quite a bit higher (I modeled upto 10 pc) without really having an impact on affordability. Also to clarify, we have the assets to do a higher down payment, going in with 10 % down is a personal preference.

My questions for the group: is there anything I'm missing here about either options? Any gotchas (especially with the HELOC in the 80-10-10) to be aware of?
Olemiss540
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Re: 80-10-10 vs 30y fixed mortgage

Post by Olemiss540 »

I vote for 20% down on a conventional 30 year mortgage. Is that even an option?
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Tortoise2030
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Re: 80-10-10 vs 30y fixed mortgage

Post by Tortoise2030 »

I probably would sleep better with the one loan knowing my payment would be fixed.
invest4
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Re: 80-10-10 vs 30y fixed mortgage

Post by invest4 »

Olemiss540 wrote: Mon Jun 21, 2021 8:07 pm I vote for 20% down on a conventional 30 year mortgage. Is that even an option?
+1
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RickBoglehead
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Re: 80-10-10 vs 30y fixed mortgage

Post by RickBoglehead »

Olemiss540 wrote: Mon Jun 21, 2021 8:07 pm I vote for 20% down on a conventional 30 year mortgage. Is that even an option?
+1,000.

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sunny_socal
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Re: 80-10-10 vs 30y fixed mortgage

Post by sunny_socal »

I've done an 80/10/10 several times and it's always been a matter of convenience, eg when we're switching homes and don't wish to spend the cash for the loan. But it's always somewhat suboptimal since you're paying a little extra for that 10% loan. I always refi into something safer as soon as I can.

In your case I vote for the 90/10 since you only want to put 10% down. You said you could put down more but you don't want to. You planned on paying down the HELOC aggressively, instead you can just pay down the 90% fixed mortgage.
ScaledWheel
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Re: 80-10-10 vs 30y fixed mortgage

Post by ScaledWheel »

1. Does the entirety of what you're borrowing fall under the federal limit of $750k for the mortgage interest deduction?
2. Do you plan to stay in this house for a long time?

We did your option 2, with the goal of paying off the HELOC in 2-3 years. Similar to another poster, we are looking to see if we can refinance to a single loan sooner.

If you are planning to stay there for a long time (15+ years) I would feel compelled to lock in the extra 0.25% rate savings and just throw money at the HELOC to pay off ASAP. I'd just create a simple spreadsheet to figure out total interest paid under the two scenarios.
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grabiner
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Re: 80-10-10 vs 30y fixed mortgage

Post by grabiner »

sunny_socal wrote: Tue Jun 22, 2021 7:20 am I've done an 80/10/10 several times and it's always been a matter of convenience, eg when we're switching homes and don't wish to spend the cash for the loan. But it's always somewhat suboptimal since you're paying a little extra for that 10% loan. I always refi into something safer as soon as I can.

In your case I vote for the 90/10 since you only want to put 10% down. You said you could put down more but you don't want to. You planned on paying down the HELOC aggressively, instead you can just pay down the 90% fixed mortgage.
The advantage of the 80/10/10 in this situation is that you will aggressively pay down the second loan. Then, when you get to 20% equity, you will be paying a lower rate; the rate on the second mortgage doesn't matter as much because you will pay it off quickly.
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sunny_socal
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Re: 80-10-10 vs 30y fixed mortgage

Post by sunny_socal »

grabiner wrote: Tue Jun 22, 2021 10:26 pm
sunny_socal wrote: Tue Jun 22, 2021 7:20 am I've done an 80/10/10 several times and it's always been a matter of convenience, eg when we're switching homes and don't wish to spend the cash for the loan. But it's always somewhat suboptimal since you're paying a little extra for that 10% loan. I always refi into something safer as soon as I can.

In your case I vote for the 90/10 since you only want to put 10% down. You said you could put down more but you don't want to. You planned on paying down the HELOC aggressively, instead you can just pay down the 90% fixed mortgage.
The advantage of the 80/10/10 in this situation is that you will aggressively pay down the second loan. Then, when you get to 20% equity, you will be paying a lower rate; the rate on the second mortgage doesn't matter as much because you will pay it off quickly.
Looks like they are about the same

The difference is only 0.25% between the 90% loan and 80% - plus OP said points were required to get the lower rate with a 4-year breakeven period

Example: Go with the 80/10/10 as proposed
- Goal: pay off the 10% 2nd in 4 years (per OP)
- Purchase 500k, 10% down
- 450k total loan amount
- 1st: 400k @ 2.75%, 30-yr, $1632/month
- 2nd: 50k @ 5%, 15-yr, $395/month + 750/month = $1145/month (assuming 4-year payoff per OP)
- Total payment $2777/month for first 4 years, then $1632

After about 4 years the 1st mortgage would be down to about $364k.

Example: Go with 90%
- Contribute the same 'extra' payment toward the 90% loan instead, during first 4 years
- Purchase 500k, 10% down
- 450k total loan amount
- 1st: 450k @ 3%, $1897/month
- Pay similar 'extra' amount for 1st 4 years: 1145-(1897-1632)= +880/month
- Total payment $2777/month for 4 years, then $1897/m

After about 4 years the 1st mortgage would be down to about $366k

We don't know what points OP would be paying
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