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Is an 80/20 mortgage a good idea?

Dear Dave,

Will you explain what an 80/20 mortgage is and if it’s a good idea to get one?

Jeremy
Franklin, Tenn.

Dear Jeremy,

To start with, I’ll tell you that the 100% down plan is always the best idea. That way you don’t have any payments. However, I have a really hard time selling people on that plan. An 80/20 mortgage is the next best thing. What this means is that a 20% down payment was made and the loan is 80% of the value. With this type of loan, you can get a conventional loan and do away with what is referred to as PMI – private mortgage insurance. That insurance is basically foreclosure insurance that pays the mortgage company in the event they have to foreclose on you. On other loans, mortgage companies make you buy this insurance, which costs you about $75 a month per $100,000 borrowed. So you want to do away with that if you can, and an 80/20 loan will allow you to get out of the PMI.

Dave

Where can you effectively sell a car?

Dear Dave,

I think I’ve got my husband on board on working your plan to get out of debt. We’ve been married three years and have three kids. We have a new mortgage, a car payment and credit card debt. We have one vehicle that we had to pay off in order to get the mortgage approved – it’s an older Durango worth about $16,000. My car is a newer Saturn and that’s the one for which we still owe about $9,000 and it’s worth about $10,000.

We were discussing this the other night and I told him I have a feeling your advice would be to sell the car and buy a cheaper one for cash. However, this brought up what may sound like a stupid question, but where do we sell a car? We see ads in the paper every day to sell cars. Do we sell it that way? We’re also worried about selling the car and then being without a car for a while. Especially since neither of us have family in this area. My family is in Florida and his is in Colorado. We don’t really take family vacations, but we do go visit with family pretty regularly. We also want to be sure we have reliable transportation for those trips.

I’m really proud of the direction in which we’re moving to get out of debt. I passed up the opportunity to go on vacation next week because I couldn’t pay cash for it. So, I want to get this right by doing the right thing with these vehicles.

Sandy
Louisville, Ky.

Dear Sandy,

You see those ads in the newspaper for cars because those people know that method works. So, if you put an ad in the paper to sell your car at a reasonable price, your car will sell.

You don’t want to sell your car and be without transportation, but with the figures you’ve given me, you could sell both vehicles, pay off your Saturn and still be able to pay cash for two $8,000 cars.

If you’re worried about having a newer vehicle for your trips to see family, just go rent a nice van with a TV and VCR or DVD player in back for those trips. If you’re taking long trips, they’re probably not that comfortable with five of you piled into that little Saturn anyway.

Congratulations on making the commitment to become debt-free. You’ve discovered that being normal means being broke. You look good, but you have no money. That’s a foolish way to live that is no fun and holds no financial future for you. Good job for making that decision. Now, how radical you want to be in getting out of debt is your choice. Sharon and I went bankrupt, so we got really radical and we’re through forever with having debt. It would have taken us about ten seconds to have those cars listed in the paper. Then, once they sold we would have bought two $8,000 cars, which can be pretty nice cars. Then we would have immediately started saving to move up in car, because I want us (and you) to have nice cars – I just want them to be paid for with cash later. And in your case, that later would also be after you’ve cleared up that credit card debt that you mentioned.

Dave

Disclaimer: Questioner’s identities have not been verified by Dave $ays column or this newspaper.

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