A combination mortgage is comprised of two separate mortgages applied on the same property, from the same lender for the same borrower. In a typical combination loan, the borrower applies for and receives two loans, ideally from the same lender. The first loan basically provides funds for the larger percentage or the total amount of money that the borrower requires. The loan is usually used by the borrower to pay for the construction costs of a new home at the completion of construction. It is a variable rate mortgage with lower interest rate. To get qualified for this loan, one has to have a good credit score. The second loan is usually used to pay for the initial loan and becomes the permanent mortgage on the home. It has a higher interest rate or a fixed rate.
Combination mortgage tends to be most common type of loan to buy an existing property in the housing markets. It allows the buyers to borrow more money than their down payment might otherwise allow.Explore Definition
Borrowers generally opt for a combination mortgage when they want to avoid paying private mortgage insurance, want to avoid strict structure for huge loans or when they are buying a second property as they wait for the first property to sell. An important thing to keep in mind here is to wait until one can afford the down payment without two loans.
Majority of combination mortgages or piggy-back mortgages consist of an 80% variable rate mortgage, a 10% fixed rate mortgage and a 10% down payment, which allows the borrower to avoid private mortgage insurance.