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Understanding Combo Loans

How Combo Loans Work

Combo or piggyback loans are financing that combines a first mortgage with a second mortgage (with or without a down payment). The reasons these types of loans are appealing are because many home buyers do not have 20% of the purchase price in cash or do not want to put down 20% to buy a home -- and combo loans sidestep the requirement to pay PMI. Common types of combo loans are:

The interest rates on a second mortgage are higher than those on a first mortgage, but sometimes the total payments are less than those financed on a first mortgage with private mortgage insurance. Moreover, since combo loans reached a peak in 2005, many borrowers are considering other options because of short-term interest rate fluctuations.

Comparing PMI and Combo Loans

Let's compare two borrowers with identical FICO scores of 680. Here is how the numbers work:

80/20 Financing
Say the Klingon family buys a $500,000 home using 80/20 financing. The first mortgage would be at 6.25% and payable at $2,462.87 per month for principal and interest. The second mortgage would be at 8.5% and payable at $768.91 per month, principal and interest.

Total payments for a combo loan: $3,232

100% with PMI
But the Romulan family buys a $500,000 home using 100% financing with PMI insurance. The first mortgage would be also at 6.25% but payable at $3,079, and PMI insurance adds another $400 to that payment.

Total payments for a first mortgage with PMI: $3,479.

The Romulan family needs to wait two years, and obtain an appraisal to show 20% equity, to get rid of the insurance. But say the Romulans do, and the payment drops to $3,079 without PMI. The Romulans would not pay less than the Klingons until month 63 of the loan.

Features of Income Tax Provision for MMI / PMI

Mortgage Insurance premiums (MMI) are paid on FHA, VA and Rural Housing Loans, and some conventional loans require private mortgage insurance (PMI), both of which are deductible subject to certain provisions:

Experts are predicting another renewal of the provision based on the following:

Students - Home Buyers - Newly Married - Divorced - Military - ID Theft Victims - Parents