1st / 2nd Combo Loans
A 1st/2nd combo loan (also known as a "piggyback loan") can be a great strategy for homebuyers who want to avoid paying private mortgage insurance (PMI) while still keeping their down payment lower. In this arrangement, you take out two separate loans simultaneously to cover the full purchase price of the home. Here’s a breakdown of the benefits:
1. Avoid PMI (Private Mortgage Insurance)
One of the biggest advantages of a 1st/2nd combo loan is that it allows you to avoid PMI, which is typically required if you put down less than 20% on a conventional mortgage. In a combo loan, the first mortgage usually covers about 80% of the home's value, and the second mortgage covers the remaining 10-20%. Since the second loan is structured as a home equity loan or line of credit (HELOC), you don’t need to pay for PMI, which can save you hundreds of dollars each month.
2. Lower Down Payment
With a 1st/2nd combo loan, you can make a lower down payment while still securing favorable financing. This can be helpful if you don’t have the full 20% to put down but want to avoid PMI. Instead of paying for PMI, you use the second loan to cover the difference between your down payment and the 20% equity threshold, often requiring just 10-15% down on the home.
3. Potentially Lower Interest Rates
While the second loan typically comes with a higher interest rate than the first, it may still be more affordable than paying for PMI over the life of the loan. Plus, you might find that the combination of both loans results in a lower overall monthly payment, especially if the second mortgage has an interest rate that's still competitive.
4. Flexibility with the Second Loan
The second loan in a 1st/2nd combo mortgage is often a home equity loan or a home equity line of credit (HELOC). This gives you more flexibility, depending on your loan structure. A HELOC, for example, allows you to borrow and repay the funds as needed, which can be useful if you need extra cash for home improvements or other expenses down the line.
5. Faster Path to Homeownership
Using a 1st/2nd combo loan can help you buy a home sooner, especially if you don’t have enough saved up for a large down payment. This could be especially beneficial in a competitive housing market where waiting to save for a 20% down payment could delay your home purchase.
6. Consolidation of Debt (in Some Cases)
If the second mortgage is a home equity loan, it might also offer opportunities to consolidate higher-interest debt, depending on the loan terms. This can help you pay off other debts more efficiently while keeping everything tied to your home’s equity.
7. More Competitive Than Other Low Down Payment Options
While FHA loans and other government-backed loans can allow for low down payments, they often require mortgage insurance and have stricter eligibility criteria. A 1st/2nd combo loan can provide more flexibility in terms of financing and allow you to bypass some of the requirements that come with government programs.
Example:
Say you're buying a $300,000 home and only have $30,000 to put down (10%). Without a combo loan, you'd likely need PMI. But with a 1st/2nd combo loan, you could take out a first mortgage for $240,000 (80%) and a second mortgage for $30,000 (10%). You’d avoid PMI and still put down less than 20%, keeping your monthly payments more manageable.
A 1st/2nd combo loan can be a great option for people who want to keep their down payment low but avoid the added cost of PMI. If this sounds like a good fit for your situation, I can help you explore the details and determine if this strategy works with your financial goals. Let’s chat about your home purchase plans and see if a 1st/2nd combo loan could be the right move!