- The combo mortgage is made up of two mortgage loans that are used in concert in either a purchase or a refinance transaction. Both loans are recorded against the same property with the first mortgage obviously taking the first lien position. In the majority of transactions, the first lien mortgage ends up being between 70 and 80 percent of the purchase price. Although in many cases it is much easier to get both loans from the same lender, in more aggressive real estate markets, lenders routinely allow borrowers to acquire the second lien mortgage from another lender.
- Combo mortgage loans have been an integral tool in helping make home purchases more affordable for borrowers. Their availability has also provided potential borrowers an important option to consider when purchasing a home. Furthermore, choosing to add a second mortgage to a purchase transaction as opposed to putting more money down, allows people to write off more in interest payments on their annual income taxes.
- Traditionally, people seeking a mortgage needed to put down anywhere from 20 to 50 percent of their own money to complete a home purchase. Over the years, as mortgage lending has loosened up, lenders began to allow first mortgages to exceed 80 percent of the purchase price. However, anytime a loan goes above 80 percent loan to value (LTV), the borrower is required to purchase potentially expensive mortgage insurance to protect against default. The availability of combo mortgages has allowed borrowers to get loans totaling over 80 percent LTV while avoiding the need to get mortgage insurance.
- There are several common types of combo loans. In aggressive lending markets in which 100 percent financing is readily available, it's common for borrowers to seek the 80-20 combo loan. In this variety, 100 percent of the financing is provided. In tighter lending markets, the 70-20 or 80-10 combo loans tend to be more common. Many lenders also require that the first loan in the combo package be a fixed loan. The second liens are traditionally either a home equity line of credit (HELOC) or a 15-year fixed mortgage, commonly called a closed-end second.
- While combo loans can be convenient for the average borrower, there are several things to consider before getting one. As previously mentioned, HELOCs are a popular second lien mortgage used in combo loan transactions. Although HELOCs are popular in times of low rates, they are rarely fixed and will often go up as the prime interest rate does. For example, if you opened a HELOC at 5 percent when the prime rate was at 4 percent, that same loan would rise to 10 percent if the prime rate rose to 9 percent. Borrowers should also be aware that many fixed rate second mortgages have a balloon payment due at the end of either 10 or 15 years. Be sure to clarify these points with your mortgage broker to avoid any nasty surprises in the future.
