Identification

• With an 80/20 ARM loan, the borrower takes out two mortgages, with the first totaling 80 percent of the purchase price. The second loan "piggybacks" onto the first and makes up the other 20 percent of the price. In most cases, the borrower's only initial financial obligation is to pay the closing costs. This makes an 80/20 loan an attractive choice for buyers who may have difficulty coming up with a down payment.
  
  

No PMI

• With a traditional mortgage, borrowers typically need to purchase private mortgage insurance if they are unable to make a down payment of at least 20 percent of the home's purchase price. PMI protects the lender against the possibility that the borrower could default on the loan. A major benefit of an 80/20 loan is that because the the second loan in effect covers the down payment, the borrower avoids the need to carry PMI on the first loan.
  
  

Adjustable Rates

• With an 80/20 ARM mortgage, the interest rates are adjustable, meaning they can go up or down at predetermined intervals over the term of the loan. For instance, a 5/1 ARM means that the interest rate is locked in for the first five years, then may adjust on an annual basis. The mortgage industry uses certain indexes that measure current economic conditions when determining whether to make an adjustment and to what degree.
  
  

Risks

• While 80/20 ARM mortgages can help buyers get into a home, they do come with certain risks. Because the borrower is so heavily leveraged, he may find himself "upside down," meaning he owes more than the property is worth, especially if the property decreases in value. As with any ARM loan, there is also the risk that a rise in interest rates and the resulting increase in the monthly mortgage payment could mean that the borrower may no longer be able to afford the home.