What does Alt-A loans and 80/20 combos mean in the lending aspect?

Question

My broker was throwing out these terms and I ,not savvy in the loan department, just listened and agreed. With a credit score of 680 he's trying to finagle a better refi for us. An option 5/1 ARM seemingly is the best but we can't secure it. Now he wants to do a $560k and $70k loan fixed. Good idea? We need to lower our payments somehow. He's trying smaller banks.

Answer 1

Alt A loans are for people who are between prime and subprime candidates. They have some credit issues so they're not the best risks, but the issues aren't serious enough to consider them subprime borrowers.

An 80/20 combo is a way to avoid paying mortgage insurance. When you borrow more than 80% of the value of the property, most lenders required you to pay mortgage insurance until the loan-to-value ratio is 78%. Instead of doing that, you might get an 80% loan as your primary mortgage, then get a 2nd loan (we call it purchase money second) for the other 20%. Then you don't pay mortgage insurance because the 1st mtg is for 80%. Other options are 80/15/5 and 80/10/10...80% for the first, 15% or 10% for a second, then 5% or 10% as a downpayment from the borrower.

The 5/1 means that the rate will be fixed for the first 5 years, then adjustable after that. The adjustment may be annual or semi-annual, generally with a 2% cap on adjustments and a max of 5% or 6% over the life of the loan. Be sure you understand the terms before you accept any loan, but especially an adjustable rate loan. You'll probably want to refinance in 5 years.

680 isn't a bad credit score. It could be better, but it's not awful. Since you're borrowing more than $417000, your loan will be considered a jumbo and the rate may be a little higher than if it was conventional -- unless you're in Alaska or Hawaii, where the cut-off is higher, but I can't remember what it is.

Is it a good idea? It can be. You have to be aware of the rate on the 2nd which could be pretty high, and remember that if you want to refinance, many lenders can't refinance over 90% - 95%. Ask the broker what the ltv will be in 5 years if you make no additional principal reduction payments. If it's over 95%, you may not be able to refinance at the first adjustment. Also ask if the 5/1 has a conversion option and that there are no prepayment penalties.

You could probably do as well by calling a few banks yourself.