Definition of 'Combination Loan'
1. A transaction consisting of two separate loans for the same borrower by the same lender. The initial loan is used to finance the construction of a new home; upon completion of construction, the loan is repaid by a second loan, which is a permanent mortgage on the home. The initial construction loan is usually an adjustable-rate mortgage, while the subsequent mortgage might be any one of the mortgage types available.
2. The simultaneous use of a first and second mortgage to finance a home. The first loan is usually made for 80% of the home's value and has a first lien position, while the second loan is usually for 10-20% of the home's value and has a second lien position. This transaction is frequently used to avoid having to pay private mortgage insurance.
This type of combination loan is also known as a "piggy-back" or "80-10-10 transaction".
Investopedia explains 'Combination Loan'
1. Consumers have options other than using a combination loan in the construction of a home that is to be their permanent residence. For example, the builder might finance construction. When the house is complete, the buyer gets a mortgage. Alternatively, the consumer might use a stand-alone construction loan where, upon completion of the construction, the consumer shops for a permanent mortgage from a different lender. The advantages of a combination loan can be one-time closing costs. The disadvantages are being locked into a single lender's loan programs without being able to shop for the best interest rate at the time of the second loan.
2. The choice between using a piggy-back combination loan or paying private mortgage insurance is largely a function of how quickly a person expects his or her home to appreciate. When the loan to value (LTV) ratio of a single stand-alone mortgage reaches 78%, private mortgage insurance can be eliminated. If a combination loan is used to avoid private mortgage insurance, the second loan, which usually carries a higher interest rate than the first mortgage, will have to be paid off through a refinance transaction.