Combination Loan

A A A

DEFINITION

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

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 against loss ...
  2. Non-Purpose Loan

    A type of loan that uses an investment portfolio as loan collateral and the ...
  3. Lien

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

    A lending risk assessment ratio that financial institutions and others lenders ...
  5. Construction Loan Note - CLN

    A short-term obligation in the form of a note, used for the funding of construction ...
  6. Second Mortgage

    A type of subordinate mortgage made while an original mortgage is still in effect. ...
  7. Piggyback Mortgage

    A type of mortgage where a second mortgage or home equity loan is taken out ...
  8. 80-10-10 Mortgage

    A mortgage transaction in which a first and second mortgage are simultaneously ...
  9. Lender-Paid Private Mortgage Insurance

    Private mortgage insurance that a mortgage lender pays on behalf of a borrower. ...
  10. Forbearance

    A temporary postponement of mortgage payments.
Related Articles
  1. How Interest Rates Affect The Housing ...
    Economics

    How Interest Rates Affect The Housing ...

  2. Understanding Your Mortgage
    Personal Finance

    Understanding Your Mortgage

  3. Make A Risk-Based Mortgage Decision
    Options & Futures

    Make A Risk-Based Mortgage Decision

  4. 4 Steps To Attaining A Mortgage
    Credit & Loans

    4 Steps To Attaining A Mortgage

  5. Understanding The Mortgage Payment Structure
    Credit & Loans

    Understanding The Mortgage Payment Structure

  6. 5 Tips For Recession House Hunters
    Home & Auto

    5 Tips For Recession House Hunters

  7. Why It’s So Hard to Get Small Mortgage ...
    Credit & Loans

    Why It’s So Hard to Get Small Mortgage ...

  8. Top Reasons To Apply For An FHA Loan
    Credit & Loans

    Top Reasons To Apply For An FHA Loan

  9. Measuring The Benefits Of Home Ownership
    Home & Auto

    Measuring The Benefits Of Home Ownership

  10. Mortgages: Fixed-Rate Versus Adjustable-Rate
    Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center