What Are the Benefits of a Combo Loan?

Combo loans can have different definitions depending upon who is describing them. With the advent of financial products that offer credit card consolidation and other debt repayment packages, the original meaning of the combo loan is getting lost. If you are purchasing a home, then a combo loan may be of interest to you. When combo loans came into existence, down payment requirements in the mortgage industry began to change.

Defining A Combo Loan

Traditional definitions of a combo loan refer to combining two loans for a mortgage instead of a single loan. It is considered an option for financing a home. The definition has begun to change to include the combination of loans to cover a home mortgage and other debt, including credit card debt. Some finance companies go so far as to remove the mortgage from the process by calling a debt consolidation loan a combination loan. The term combo is used here because it combines previous loans and debt. Traditional definitions of a combo loan have provided the means of home ownership for many.

Benefit: No Down Payment

Each loan has a particular function in a combined loan package. Although terms will vary from finance company to finance company the function of the loans is generally the same---the first mortgage covers the bulk of the home price and the second mortgage covers the down payment on the purchase. The reason most combo loans are used is because the purchaser does not have enough of a down payment required to cover the risk the bank is taking in loaning the money. This is the first benefit of a combo loan---no down payment, the dream of home ownership for those without immediate cash.

Benefit: Avoiding PMI

Private mortgage insurance (PMI) is the alternative to combo loan financing. Financial institutions arrange for the insurance between the borrower and the PMI company and add the cost on to a single loan. The purchase of the insurance can often cost the home owner more a month than a second mortgage would. In addition to a higher monthly payment, PMI is not tax deductible. Mortgage insurance is tax deductible which gives the home owner more savings.

Benefit: Securing Lower Rates

Finance companies charge different loan rates on each of the loans in a combo loan. Because a borrower is signing for two loans, one of the benefits is a lower interest rate on the first, larger loan. Remember, the lender is making money on two loans that combine to pay for one item. A single loan may cover 90 percent of the home price. That loan may only have had a 5 percent interest rate. But a combo loan, two loans sometimes totaling a full 100 percent of the cost of the home, means two separate lower interest rates and more profit for them but less cost for the borrower. 4.75 percent on the first loan is far better the 5 percent for a single loan.

Benefit: More Loan Options

Two loans can often provide the borrower with more total financing dollars. Caps on single loans are usually set at 90 percent but a combo loan can be broken down into an 80/20 combination---the first loan at 80 percent and the second loan at 20 percent. That means no down payment. Another twist to a combo loan is what happens when the bank offers the second loan as a Home Equity Line Of Credit (HELOC). As the payments are made toward the second loan the amount the borrower has access to grows.