Combination Loan

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. 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. Lien

    The legal right of a creditor to sell the collateral property ...
  4. Second Mortgage

    A type of subordinate mortgage made while an original mortgage ...
  5. Construction Loan Note - CLN

    A short-term obligation in the form of a note, used for the funding ...
  6. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and ...
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

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  7. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  8. Home & Auto

    7 Must-Have Real Estate Contract Conditions

    Buying a home can bury you in paperwork. But it’s worth your time to make sure your contract contains these seven important conditions.
  9. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  10. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  4. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  5. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  6. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center