If you’ve started the home buying process, you’ve probably heard about 30-year fixed rate mortgages, the most common type of home financing. But there are many other options available, including loans with adjustable rates, shorter terms, and construction loans.
One of the lesser-known types of mortgages is a combination loan, which is what it sounds like: two loans for a single transaction. But why would a borrower need two loans? Do they have to qualify twice? Are there extra fees involved?
Fear not—in this post, we’ll cover all these questions and more.
A Perfect Blend?
To better understand combination loans, let’s first look at how a 30-year fixed-rate mortgage works.
For this type of loan, a homebuyer makes a down payment toward the purchase price of a new home and the mortgage covers the rest. If a borrower puts down less than 20%, however, they will need to pay for private mortgage insurance, or PMI, which protects the lender in case the borrower can’t make payments. PMI typically adds another $200 to $300 to the borrower’s monthly payment, depending on the size of the loan.
Now, let’s compare this to a combination loan. A combination loan is two mortgages—a regular mortgage, and a second loan that covers part of the borrower’s 20% down payment. This enables borrowers to pay less money out of pocket towards the down payment, as the remainder of the 20% down payment is covered by the second loan—plus the borrower does not have to pay for PMI.
For example, a typical combination loan is an 80-10-10 mortgage. The first number represents the first loan, or the primary mortgage, which covers 80% of the home’s price. The second number represents a second loan that covers 10% of the home price, while the last number represents the 10% the buyer is paying from their own funds towards the down payment.
So ultimately, a combination loan—sometimes referred to as a “piggyback loan”—offers an alternative way to structure your home financing based on your individual goals and challenges. But there’s a little more to it than that.
Pros and Cons
In a tight market where prices are rising, a combination loan could help potential borrowers who may not have a down payment of 20% keep their payments as low as possible. In some cases, a combination loan could also be used to keep the first loan under conforming loan limits, which makes the mortgage underwriting process easier compared to a jumbo loan.
In most cases, a combination loan enables borrowers to secure their dream home with less money out of pocket upfront while avoiding PMI. However, a borrower would still have to qualify for both loans. Plus, the second loan typically comes with a slightly higher interest rate, as well as different requirements, different loan terms and additional fees and closing costs.
For this reason, it’s important to consider your overall financial situation carefully before choosing a combination loan. For instance, with a combination loan, your overall monthly payment may be lower than if you had a single mortgage and PMI. But PMI can be removed after you’ve accumulated 20% equity in your home, so after a few years it’s possible that your monthly payment could be higher with a combination loan than with a single mortgage.
How We Can Help
Approaching the home financing process can be challenging for any homebuyer. That’s why it’s important to find a lender that offers a wide variety of financing options and will work with you to determine the best option for you.
For instance, Right By You Mortgage offers a unique combination loan program designed to provide borrowers with a simple path to homeownership. Our program enables homebuyers to secure financing with as little as 10% down by combining a conforming loan of up to 80% of their home’s price with a second loan. Both loans are available at very competitive fixed rates.
Right By You Mortgage also offers a special rate discount for borrowers who choose to make automatic mortgage payments from their Fidelity Bank account, so they can save money over the lifespan of their mortgage. It’s part of our commitment to making our customers’ homebuying journey as easy, transparent and affordable as possible.