Combination Loan

AAA

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.

RELATED TERMS
  1. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  2. Non-Purpose Loan

    A type of loan that uses an investment portfolio as loan collateral ...
  3. Second Mortgage

    A type of subordinate mortgage made while an original mortgage ...
  4. Lien

    The legal right of a creditor to sell the collateral property ...
  5. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and ...
  6. Construction Loan Note - CLN

    A short-term obligation in the form of a note, used for the funding ...
RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  4. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  5. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  6. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    4 Steps To Attaining A Mortgage

    It starts with knowing your choices as well as your price range. We show you how to get there.
  2. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  3. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  4. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  6. Home & Auto

    Are Home Inspections Worth It? - Price vs. Value

    If you’re wondering whether home inspection is worth the investment, the following information will help you decide.
  7. Investing Basics

    Explaining Absolute Return

    Absolute return refers to an asset’s total return over a set period of time. It’s usually applied to stocks, mutual funds or hedge funds.
  8. Investing Basics

    How To Create Capital Protected Investment Using Options?

    Does "Capital-Protection" guarantee in an investment product sound attractive? Wait! Here's how you can create a better one for yourself, at low-cost!
  9. Options & Futures

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  10. Investing

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!