By Ben Afzal

From the Archerpacific.com Loan Library

This type of loan offers a means to avoid paying private mortgage insurance (PMI).

Lenders who offer 100% financing typically offer them as a loan broken down into two pieces - a first loan for the first 80%, and a second loan to cover the final 20%.

The reason the loan is broken up is that the borrower does not have to pay private mortgage insurance (PMI) on either loan. A typical 100% loan has this PMI charge as an additional charge to compensate the lender for the risk involved in 100% financing. For a lending institution a 100% loan on a property offers them no equity 'cushion' in case the value of the property goes down.

Some lenders offer a single 100% loan without a PMI payment, but their interest rate is usually higher to compensate them for this.

Typical 80/20 loans have one interest rate for the first 80% and usually a higher rate for the final 20%. Both of these loans have different risk profiles. A lender can sell the two different loans to different types of loan investors - the 80% can be sold to those with a lower appetite for risk, while the final 20% is sold to investors with a higher appetite for risk. The loan for the first 80% gives it the loan first dibs on the property if the loan goes under. They are paid first, and if there is any money left over then the final 20% is paid. It is the secondary nature of the final 20% loan that requires a higher interest rate to compensate for this risk.

An 80/20 loan is a loan structure. The loan itself can come in many forms. The first 80% loan can be a regular loan, an interest-only loan, a 30 year fixed loan, a loan that is fixed only for the first 2 years, etc. There are also many different types of loans that the second 20% loan can be. It can have an interest-only feature to keep its cost down.

For more information visit www.archerpacific.com Loan Library

The author is the owner of Archer Pacific, a mortgage company. The firms website, www.archerpacific.com, has extensive resources and tips on many mortgage topics.