A Combination mortgage offers homebuyers a way to avoid private mortgage insurance (PMI) while making a smaller down payment. This financing strategy uses two simultaneous loans to purchase a home, but it's not the right choice for every buyer. Here's what you need to know to determine if a combination mortgage fits your financial situation.

What Is a Combination Mortgage?

A combination mortgage combines two loans to finance your home purchase. The first mortgage typically covers 80% of the home's value, while a second mortgage covers an additional 10% to 15%. You provide the remaining amount as your down payment.

The most common structures are 80-10-10 and 80-15-5. In an 80-10-10 arrangement, you get a first mortgage for 80% of the purchase price, a second mortgage for 10%, and make a 10% down payment. In an 80-15-5 structure, the second mortgage covers 15% while you put down 5%.

This structure keeps your first mortgage at or below 80% of the home's value, eliminating the need for PMI.

Advantages of Combination Mortgages

• Avoid PMI costs. Private mortgage insurance typically costs 0.5% to 1% of your loan amount annually. On a $300,000 mortgage, PMI can add $125 to $250 to your monthly payment. A combination mortgage eliminates this expense entirely.
• Lower upfront cash requirements. Instead of saving 20% for a down payment, you can purchase with as little as 5% to 10% down. This allows you to buy sooner while still avoiding PMI.
• Potential tax benefits. Mortgage interest may be tax-deductible, and unlike PMI premiums, the interest on both your first and second mortgages could potentially qualify for this deduction. Consult with a tax professional to understand how this applies to your specific situation.
• Flexibility in loan amounts. Combination mortgages can help you stay within conforming loan limits in high-cost areas. If you need to borrow more than the conforming limit in your area, using a combination structure might offer better rates than a single jumbo loan.

Disadvantages of Combination Mortgages

• Higher interest rates on second mortgages. The second loan typically carries a higher interest rate than your primary mortgage because it represents greater risk to the lender. This higher rate can offset some or all of the savings from avoiding PMI.
• Two separate loan payments. Managing two mortgages means dealing with two servicers, two payment due dates, and two sets of loan documents. This complexity increases administrative burden and the risk of missed payments.
• More difficult refinancing. Refinancing with a combination mortgage requires handling both loans. You may need to refinance both simultaneously or pay off the second mortgage entirely, adding complexity and potential costs to the process.
• Stricter qualification requirements. Lenders scrutinize combination mortgage applications carefully. You'll typically need strong credit, stable income, and low debt-to-income ratios to qualify for both loans simultaneously.
• Variable rate risk. Second mortgages often come with adjustable rates or shorter terms, creating payment uncertainty. Your second mortgage payment could increase over time, straining your budget.

Calculating the True Cost

Compare the total cost of a combination mortgage against alternatives before committing.

Consider a $300,000 home purchase. With a conventional loan and 10% down, you'd borrow $270,000 and pay PMI until reaching 20% equity. With an 80-10-10 combination, you'd have a $240,000 first mortgage and a $30,000 second mortgage.

Calculate your total monthly payment for each scenario, including principal, interest, and PMI where applicable. Factor in the higher interest rate on the second mortgage and project how long you'd pay PMI under the conventional loan scenario. This comparison reveals which option costs less over your anticipated ownership period.

Alternative Options to Consider

Combination mortgages aren't your only path to homeownership with a small down payment.

Conventional loans with PMI. PMI automatically cancels when you reach 22% equity, and you can request cancellation at 20%. With strong home appreciation, you might eliminate PMI within a few years.

FHA loans. These government-backed loans accept down payments as low as 3.5% and accommodate lower credit scores. However, FHA mortgage insurance remains for the life of the loan if you put down less than 10%.

VA loans. Veterans and active military members can buy with zero down payment and no mortgage insurance through VA loans.

First-time homebuyer programs. Many states and municipalities offer down payment assistance grants or low-interest loans to qualified buyers.

Is a Combination Mortgage Right for You?

A combination mortgage makes sense in specific circumstances:

You have stable, verifiable income that comfortably supports both loan payments. Your credit score qualifies you for competitive rates on both mortgages. You plan to stay in the home long enough to recoup closing costs on two loans. You're comfortable managing multiple financial obligations simultaneously.

A combination mortgage may not suit you if you have irregular income, marginal credit, plan to sell within a few years, or prefer simpler financial arrangements.

Making Your Decision

Before choosing a combination mortgage, obtain detailed quotes for both loans including all fees, rates, and terms. Compare this total cost against conventional financing with PMI and other low down payment options.

Consider your long-term plans for the property. If you expect to refinance or sell within a few years, the complexity of a combination structure may outweigh its benefits.

Get Expert Guidance on Your Financing Options

Choosing the right mortgage structure significantly impacts your monthly budget and long-term financial health. Our experienced loan officers can analyze your specific situation, compare all available financing options, and help you select the approach that best meets your needs. Contact us today to discuss whether a combination mortgage or another loan program is right for your home purchase.