What Is a Combination Loan

A Combination loan could be appropriate for your needs if you don't have the necessary funds for a down payment, can't access liquid funds at the time of your purchase, or you need a large loan. Combo loans, sometimes referred to as piggyback loans, is financing that incorporates a second mortgage behind a larger first mortgage.

In this blog we will discuss what a combo loan is and how they can benefit a borrower.  There are several reasons these types of loans are appealing…

1)      Many home buyers do not have the ideal down payment, typically 20%, for that particular property

2)    Many home buyers do not want to put down or liquidate the necessary assets to get to that down payment

3)     May be used as an additional option besides traditional mortgage insurance (MI)

In high cost areas such as ours it can be very difficult to save the required funds to get to an ideal down payment.  Combo loans allow access to funds for borrowers that may not have access to a large down payment.

Many borrowers have worked very hard to save for a large down payment.  When a borrower faces the reality of having to part with their savings, they may feel as though they are not going to be able to replenish their savings in the manner they would like.  A combo loan allows them options in retaining a portion of their savings.

Many people must purchase MI if they lack the traditional 20% down payment. MI applies to the first loan on your home in the event that the loan amount exceeds 80% of the purchase price or value in a refinance.  When you have a combo loan, the first loan is for 80% of the lesser of the purchase price (or the appraised value in the case of a refinance) and the second loan is for the remaining balance. The second loan normally has a higher interest rate than the first loan.

The advantage to you as the borrower is that the interest from both loans is now tax deductible. Also if you desire to pay down your loan, the second loan is for a smaller amount than the first, therefore easier to pay off. The total payment for the combination loan can be lower than if you had traditional MI. These loans are typically known as 80-15-5 (5% down payment) or 80-10-10 (10% down payment). Your down payment can be for any percentage or dollar amount. Here are two different scenarios to illustrate the option:

•                    80/15/5- This scenario involves putting down 5% of the purchase price, and financing a first mortgage of 80% of the purchase price, coupled with a second mortgage comprising 15% of the purchase price.

•                    80/10/10- This scenario involves putting down 10%, and financing a first mortgage of 80% of the purchase price, coupled with a second mortgage comprising 10% of the purchase price.

Dividing a mortgage into two loans enables you to avoid having to pay mortgage insurance. It is typical for lenders to require mortgage insurance when you finance more than 80 percent of the home’s value. If you qualify for and choose to go for a combination loan, you may avoid mortgage insurance, thereby saving money on the premium. You may also save on closing costs when the two loans go through the same lender and close at the same time. You also benefit from combination loans when your loan amount exceeds the limit for conforming loans. As of 2010, the cut-off for a conforming loan is $417,000 in most states and $729,750 for designated high-cost areas (later reduced to $625,500).  You divide up the loan so that the larger amount stays under the limit, and obtain the lower conforming interest rate for the first loan. You will want pay off the second higher-rate loan over a short period of time to decrease costs. We will be discussing conforming loans in greater detail in a future blog.

Before President Bush signed into law the Tax Relief and Health Care Act of 2006, mortgage insurance premiums were not tax deductible. As of January 1, 2007, borrowers can now deduct mortgage insurance payments on their tax returns. There are some complexities to deciding whether to get a combination loan or mortgage insurance; you have to determine what works best for your individual situation. Your mortgage lender should be able to consult with you about your best options. At Intercoastal Mortgage Company we specialize in all aspects the loan process and do our best to ensure you get your desired house. Contact me for afree consultation and take the first steps toward homeownership.