When buying a home, it’s common to look for just one mortgage product. In some cases, however, it may be necessary to obtain a combined loan or a combined mortgage instead. This type of loan is also sometimes referred to as a mortgage loan, depending on its use. Not all mortgage lenders offer combination loans, and there are pros and cons to taking one out to buy or build a home.
Key points to remember
- A combined loan is two separate mortgage loans from the same lender to the same borrower.
- Combination loans can finance the construction of a new home or the purchase of an existing property.
- Choosing a combined loan can allow borrowers to avoid paying for private mortgage insurance (PMI).
- Taking out a combined loan can increase costs in terms of interest and fees, and it also means juggling two mortgage payments.
What is a combined loan?
A combined loan consists of two separate mortgages from the same lender to the same borrower. One type of combined loan provides financing for the construction of a new home, followed by a conventional mortgage once construction is complete. Another type of combined loan provides for two simultaneous loans for the purchase of an existing home. It is often withdrawn when the buyer cannot make a 20% deposit but wants to avoid paying for private mortgage insurance (PMI).
Private mortgage insurance applies to conventional loans, although some government-guaranteed loans may have their own mortgage insurance requirements.
How a combined loan works
In the case of a new home, a combined loan usually consists of a adjustable rate mortgage to finance construction, followed by a second loan, usually a 30-year mortgage, when the house is completed. Typically, the second loan will pay off the first, leaving the borrower with only one loan.
For someone buying an existing home, a combined loan can take the form of a piggyback or 80-10-10 mortgage. An 80-10-10 mortgage consists of two loans with a down payment. The primary loan covers 80% of the purchase price of the house, the second loan covers an additional 10%, and the buyer pays a down payment of 10%.
Since the principal loan has an 80% loan-to-value ratio, the buyer can usually avoid paying private mortgage insurance (PMI), which is typically required when homebuyers make down payments below 20%. The PMI is not a one-time expense but must be paid annually until the owner’s equity reaches 20%. It usually costs borrowers an amount equal to 0.5% to 1% of the value of their loan each year.
The second loan represents the remainder of that 20% down payment. It usually comes in the form of a Home equity line of credit (HELOC). A HELOC works much like a credit card, but with a lower interest rate because the home equity backs it up. As such, it only bears interest when the borrower uses it.
A combination loan can help homebuyers avoid the added cost of private mortgage insurance, but HELOCs can come with variable (rather than fixed) interest rates.
Advantages and disadvantages of a combined loan
Taking out a combined loan to buy an existing home tends to be more common in active housing markets. As prices rise and homes become less affordable, stacked mortgages allow buyers to borrow more money than their down payment would otherwise allow. This can be an advantage as long as buyers don’t go into debt more than they can afford if something goes wrong.
Combination loans can also be an option for people who are trying to buy a new home but have not yet sold their current one. In this scenario, the buyer could use the HELOC to cover part of the down payment on the new home and then pay off the HELOC when the old home sells.
Buyers who are building a new home may have options that are simpler or less expensive than a combination loan. For example, the builder could finance the construction. Then, when the house is complete, the buyer can arrange for a regular mortgage and pay the builder. Alternatively, the owner can use a ready to build then shop around for a permanent mortgage.
However, a combined loan may have an advantage over two separate loans from different lenders because of its one-time closing costs.
Alternatives to Combination Loans
Alternatives to combination loans include a range of mortgage products. For example, instead of a combined loan, you can choose one of the following options for buying a home:
When comparing combination loan alternatives, it is important to consider how each type of loan works with respect to such things as minimum credit score requirements, PMI requirements, debt to income ratio requirements. , interest rates, down payments and fees. In the case of FHA loans, for example, it is possible to borrow with as little as 3.5% down payment and a credit score of 580. On the flip side, USDA loans and VA loans do not require a down payment, but you may be subject to higher minimum credit score requirements, depending on the lender you choose.
Jumbo loans are mortgages that do not meet compliant loan limits. You may want to consider a jumbo loan if you are purchasing a more expensive home and cannot qualify for other loan options. Keep in mind that these loans may require larger down payments or higher credit scores to qualify.
Using a mortgage calculator can help you compare the cost of loans combined with other options to help you find the one that best suits your needs.
What is a combined loan?
A combined loan is actually two mortgages combined into one. A combined loan can consist of a primary mortgage and a secondary mortgage, with each loan having its own repayment terms. A borrower who takes out a combined loan may have one or two mortgage payments, depending on how the loan is structured.
What Can Combine Loans Fund?
Combination loans can finance the construction of new homes. They can also finance the purchase of existing homes when the borrower wishes to avoid paying private mortgage insurance. In this case, a combined loan or a combined loan may be referred to as a piggyback loan or a piggyback mortgage loan.
How does a combined loan work?
A combined loan works by allowing borrowers to take out two separate loans from the same lender for the same purpose. Each loan has fixed repayment terms, and the borrower is responsible for repaying both bonds. For example, a borrower can use the first loan to pay for the construction of a new house with a second loan term starting when construction is complete.