Could be just a clerical error or, .....

Maybe the bank knows people can be tempted into borrowing more than they planned? The more you borrow, the more interest they can collect!

Borrow what you need/planned, keep your emergency fund stocked and you'll sleep easier and be ready to weather any unexpected bumps.

Molly~

I wouldn't think the rates would vary. Sometimes people borrow more than the purchase price to cover closing costs or get cash out of the home to make needed repairs. It almost sounds as if the 20% is being set up like a Home Equity line of credit or loan. You absolutely do not need to take out the entire amount! Although I'm usually not privy to the ins and outs of the final loan products my clients use, I do recall one was structured like this. If they wanted to take out additional funds after the closing they could have done so.

Well, heard from the bank. It's not a clerical error. They said sometimes people will borrow the appraised value instead of the sale price if they want extra money to buy furniture/appliances, etc. or pay off higher interest loans or credit cards. We don't need extra money for any of this, so they are re-doing the loan documents based on the sale price. I do think it was quite presumptuous of the bank to assume we need extra money! Not everyone carries heavy credit card debt...we have none...and besides our interest rate on the cc is lower than the mortgage rates we are being offered!

The 20% is a higher interest loan, but not by much than the 80% loan, and keeps us from paying PMI, which is NOT tax-deductible in our state.

Thanks for the quick responses!

"The 20% is a higher interest loan, but not by much than the 80% loan, and keeps us from paying PMI, which is NOT tax-deductible in our state."

Which state is that? It's a federal law.

Here is a link that might be useful: New tax deduction created for mortgage insurance

I would be leary of an 80/20 loan to avoid PMI. You are wise to want to beef up your ER fund, but did you know that you can also pay your PMI in full and not inside the mortgage? I view doing an 80/20 as a short term solution that winds up being more expensive than just paying the PMI outright.

Crunch the numbers to see if the 2nd mortgage, which is at a higher rate, would cost more money than pre-paying the PMI. That way you can avoid having two mortgages and do a 15 or 30 year fixed, if that is a better rate and terms than the 80/20.

"The 20% is a higher interest loan, but not by much than the 80% loan, and keeps us from paying PMI, which is NOT tax-deductible in our state."

"Which state is that? It's a federal law."

Berniek, I may be wrong, but I interpreted the OP to mean that it wasn't deductible on their state income tax return.

Don't borrow more than the sale price, why mortgage furniture, etc?

The tax laws have changed, and if your combined income is less than $100K, then mortgage insurance is now deductible. But since I'm not a tax expert, ask your tax expert.

I would look into doing the mortgage insurance over a second mortgage (HELOC) and putting 5% down. These days 80/20's are expensive.

We are NOT borrowing extra money behind the sale price of the home.

We live in Iowa and make more than $100k a year combined, so I'm not sure we'll be eligible to deduct PMI from our taxes. I'll have to look into that.

Our 80% loan is 6.6%; 20% loan is actually at a lower rate, 6.4%. I consider these pretty good rates. We went with an 80/20 knowing that we could deduct that interest from our taxes. We weren't aware we could deduct PMI (if we even can).

We think it's a better idea in the long run to build up our EF than put 5% down on the house...5% is nothing...and the extra $ in our EF may come in handy down the road. We are newly married and have very little in our EF.

"We live in Iowa and make more than $100k a year combined, so I'm not sure we'll be eligible to deduct PMI from our taxes. I'll have to look into that."

You still may be able to deduct it because the deductibility is based on your AGI, not on what you make. Your AGI could be higher or lower than your salaries, depending upon your individual circumstances. For example, my wife and I file a joint return and our AGI is more than $50,000 less than our combined salaries.