Combo Loans or 80/20 Loans, A "No Money Down" Alternative

“What is a Combo Loan?”
It’s a simple way of breaking a 100% loan into two portions. Typically 80/20, 85/15, or 75/25. Each portion is its own loan, and there are very significant advantages and benefits to the borrower who chooses to put no money down.

“Are Combo Loans complicated?”
No. They use the same information to determine loan approval for both loans at the same time. And, there will be just one closing like any other loan. These are two different loans, but they are usually held by the same lender. So you can make your monthly payment to one company. Just like any other mortgage.

“Why a Combo Loan?”
Avoid Private Mortgage Insurance (PMI). This is the biggest advantage in choosing a Combo Loan. Private Mortgage Insurance, or PMI, is insurance for the bank. Unless you are prepared to invest a 20% down payment, lenders will require you to purchase mortgage insurance for their protection. It serves no benefit to you, the borrower, it only benefits the bank. In your situation this could equate to an additional $160.00 per month. You'll also have the opportunity to receive the full tax benefit from your mortgage. All of the interest associated with both loans may be deducted from your personal income tax. PMI is not deductible. Additionally, you can accelerate payments and pay the smaller loan quicker if you choose. Thus, building more ownership in your home quicker. and the blended rate is lower. In many cases, there are rates available for a single loan covering the entire loan amount. And although they do not have PMI, the single loan rates are usually higher than the blended rate of a combo loan. Lower blended rate = Lower monthly payment.

“Blended Rate?”
Do not make the mistake of adding these rates together. This is not the case. You are borrowing different amounts at different rates. For example an 80/20 Combo Loan with rates of 7.0% on the first $100,000 (80) and 10% on the next $25,000 (20) does not equal $125,000 at 17.0%. Instead, your blended rate would be the combination of the rates and the respective portions to which they are assigned. Your blended rate in this situation would be $125,000 at 7.6%. So, by accepting an additional 0.6% in rate, you will eliminate the need for PMI or $160.00 per month, and receive the opportunity for an additional tax deduction.