Combo/Piggyback Mortgage Loan
Better Credit…Better Options
Taking out two loans is a big part of what a combo/piggyback loan is. These loans could both be adjustable-rate or fixed-rate or they could be a combination of the two. Most homebuyers lacking the 20% down payment will need a combo/piggyback loan to buy the home. They use one loan to make the down payment and avoid paying private mortgage insurance by using the other loan as the actual mortgage.
Common Situations for a Combo Loan
Since this is a combination of a first and second mortgage, it comes in a few different common types. Combo/piggyback loans can come with a down payment or without. Here are three of the most common types of situations.
- 80/20 – An 80/20 combo loan allows for no money put down and the first mortgage will cover 80% of the purchase price, while the second mortgage will cover the remaining 20%.
- 5/15/80 – This situation requires a 5% down payment with the second mortgage coving the remaining 15% of the down payment. The first mortgage will cover the bulk of the purchase price at 80%.
- 10/10/80 – With a 10% down payment, homebuyers can use this type of combo loan to cover the rest. Another 10% will be covered by a second mortgage and the remaining 80% by the first mortgage.
The main benefit of using a combo/piggyback loan is not paying private mortgage insurance. If a homebuyer takes out a 100% mortgage, they’re requires to pay PMI, which can get very expensive. Even with the higher interest rate on the second mortgage, a piggyback loan comes with a payment far less than PMI.
The biggest drawback of using a combo/piggyback loan, when you need this type of financing to buy a home is you’re really not ready or you’re buying a home out of your price range. Any time you have a 2nd mortgage it is typically going to be at a much higher interest rate. The traditional route of saving 20% to put down on a home is always the best way to go and often leads to a better financial situation for new homebuyers. Understandably, that is not possible for everyone so making sure you buy a house that fits into your budget and not just the maximum you can get qualified for is very important.
Regardless of whether you decide to use a combo loan or wait to buy your new home, it’s necessary to make sure you qualify for the best possible loan. One of the most important steps to take before applying for a mortgage is credit repair. With the help of a specialist, you can legally remove any errors from your report. This can boost your FICO score and allow you to qualify for a lower interest rate, which will lead to lower mortgage payments. It can also help you qualify for a larger loan to value amount.