Combo Loan

There are 2 different meanings of the phrase "combo loan" in the mortgage industry. The original combo loan was considered to be a combination loan consisting of a first mortgage and second mortgage. This type of loan was brought about to avoid the mortgage insurance you have when financing more than 80% of the value on the home.

Most recently this term has been used in advertising to denote a loan where by the borrower combines all of his debt into one loan on the home. Or better known as the debt consolidation loan.

Combo loans are available to borrowers of all credit types. Even with a 580 score you may still be able to qualify for the tax and money saving advantages that a combo loan can offer.

Combo loans are increasingly becoming a favorite loan program for first time home buyers and home buyers who do not have enough money to come up with a down payment. These types of combo loans are commonly referred to as 80/20 loans and 100% financing combo loans. By doing an 80/20 combo loan you are able to buy a home with no down payment required and you are able to avoid the much dreaded PMI, or Private Mortgage Insurance. Private mortgage insurance is a type of insurance that is required by the lender when you do not have at least 20% to apply towards a down payment when you are buying a home. Combo loans can help save you a lot of money when buying a home with little to no money available for a down payment.

Combo loans are available in the traditional full documentation process, but also in the stated income and/or limted doc process for self employed borrowers.

When using combo loans as a debt consolidation tool, be sure to have a plan in place as to where the extra money that you will suddenly have on hand needs to go. Your Mortgage Planning Specialist will be able to assist you in working with other professionals - financial planners, CPA's, etc. - on how best to structure your "combo" loan to take full advantage of tax breaks and increased cashflow.

Combo loans can easily be compared with a single loan by "weighting" the interest rates. For example: Somebody receives a quote for a 100% loan at 7.875%. Sounds good to them. But you want to present a combo loan, an 80/20 to them, and show them how the rate, in the end, compares, although there will be two seperate loans, one with a rate that is seemingly mich higher than wanted. So, you are able to quote them 7.5% on the first loan, and 8.5% on the second mortgage. So, to really be able to line that up agains the first rate (in a rate sense...because you can always compare overall payments if that is the borrowers focus) you can take a weighted average of those two mortgages. So in the case of an 80/20 with a 7.5% and an 8.5% rate, do the following: take 7.5 and multiply it times .8 (80% first mortgage) = 6. Then, take 8.5 and multiply it times .2 (20% second mortgage) = 1.7. Then take the 6 and add the 1.7 to it to see that your weighted average for the 80/20 in this case would leave you roughly with a 7.7% rate. Compare that against the 7.875% that was previously quoted, and here the combo loan makes more sense from a rate standpoint, and most likely from a payment standpoint also.

Besides the most common 80/20 combo loan, there are other combinations that are sometimes advantageous. 70/30 or even 65/35 loans can help you take advantage of the lowest possible rate on the first mortgage, which could make your payments even lower. An experienced loan officer can help you decide which option is best for your situation.

Many lenders now allow loans up to 100% with no mortgage insurance (which is generally required by lenders when borrowing more than 80% of the value of the home on one loan), and more still are providing lender paid mortgage insurance built into your monthly payment, often for significantly less than the combined payment on most combo loans.

A combo loan is the combination of a first loan at 80% of value and a second loan for the remainder borrowed. First loans are only allowed to be to 80% of value. The combination of two loans is used to avoid mortgage insurance.

A combo loan, such as an 80/20 or 75/25 loan is a very good idea for someone who plans to have extra money available to them in the near future. Perhaps you expect to get a large commission bonus from your job in the next few months? Or maybe you expect to receive a lot of gift money from an upcoming wedding? In this case, it makes sense to go with a combo loan where you can have a low interest rate on your first mortgage, and a higher interest rate on the smaller second mortgage. This is opposed to going with a sub-prime, non-conforming single loan, where the overall interest rate would be much higher. When you receive your additional funds, you can then pay off that second mortgage with perhaps a minimal (or no) pre-payment penalty.

A Combo loan can also be used to obtain a sum total Jumbo loan with paying the higher interest rates that most jumbo lenders require. Talk to your mortgage broker about your options.

» DISCLAIMER: The information contained in this article on 'Combo Loan' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.