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".

BREAKING DOWN '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. Home-Equity Loan

    A consumer loan secured by a second mortgage, allowing home owners ...
  2. Construction Loan

    A short-term loan used to finance the building of a home or another ...
  3. Future Advance

    A clause in a mortgage which enables the lender to advance funds ...
  4. High Ratio Loan

    A loan of any type for which a relatively small down payment ...
  5. Construction Mortgage

    A loan borrowed to finance the construction of a home and typically ...
  6. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
Related Articles
  1. Investing

    Financing Basics For First-Time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  2. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  3. Personal Finance

    Getting A Mortgage When Building Your Own Home

    It's much harder to get a loan when you're building a home, not moving into one. Here's where to look and what to expect.
  4. Retirement

    How Does A Reverse Mortgage Work?

    The basics of getting a reverse mortgage, with detailed information on how to qualify and what to watch out for.
  5. Retirement

    The Reverse Mortgage: A Retirement Tool

    Discover another way to fund your retirement without having to make payments on a loan.
  6. Personal Finance

    The New Mortgage Business: More Than Just Loans

    Many mortgage brokers adapted to the post-subprime environment by becoming loan modification specialists.
  7. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  8. Personal Finance

    How To Combine Two Mortgages Into One?

    If you have a second mortgage as well as a primary, does it make sense to consolidate into a single loan? Here's how to figure it out.
  9. Investing

    Who is Ruling the Jumbo Mortgage Market?

    The jumbo mortgage market appears to be booming this year, despite the few economic hurdles everyone's battling. Here's who is ruling the industry.
  10. Personal Finance

    Millennials Guide: How to Pick the Right Mortgage

    Here’s help in finding the perfect, affordable loan for that home you have been dreaming about.
RELATED FAQS
  1. How does the loan-to-value ratio affect my mortgage payments?

    Understand what the loan to value ratio is, how the ratio is calculated and learn how it has an impact on your mortgage payments ... Read Answer >>
  2. What’s the difference between a mortgage lender and a mortgage servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  3. What is the difference between a PMI (primary mortgage insurance) loan and a Federal ...

    Understand the difference between a conventional mortgage that requires primary mortgage insurance and a Federal Housing ... Read Answer >>
  4. How can I avoid paying private mortgage insurance (PMI)?

    Private mortgage insurance (PMI) is an insurance policy that protects lenders from the risk of default and foreclosure, and ... Read Answer >>
  5. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
Trading Center