Saturday, February 16, 2008

About Combination Mortgage Loans

An increasingly attractive mortgage option is what is referred to as the combination loan or combo loan. Combination loans have several key advantages over traditional 30-year mortgage loans and there are a wide variety of combinations to suit most financial situations.

By far, the most popular combination mortgage loan is the 80/20 loan. This loan is actually two loans. The first loan is for 80% of the homes value, and the second loan is for the remaining 20%. With the 80/20 mortgage loan the buyer pays no down payment and is ideal for those without a significant amount of savings. Another key advantage of the 80/20 mortgage loan is that the buyer avoids PMI or private mortgage insurance.

PMI is required on all mortgage loans that are greater than 80% of the homes value. A third advantage of the combination mortgage loans is that both loans are tax deductible. By avoiding PMI and increasing their tax deduction, a buyer gains a significant cost savings advantage over traditional mortgage loans.

Combination loans are available in many other ratios as well. The 70/30 mortgage loan is usually preferred over the 80/20 loan for more expensive homes, when 80% of the homes value would be classified as a jumbo loan. Above the FNMA and FHLMC limit and subject to higher interest rates. Another option is the 80/15/5 mortgage loan, where the buyers makes a down payment of 5%. Still other options include the 80/10/10, 75/15/10, etc which are all variants of the same.

In combinations mortgage loans, the primary loan usually has a 30-year amortization term, while the second loan can have 30 or 15 year term. Expect the interest rate to be about 2% higher for the second loan. The buyer can opt for a fixed rate mortgage or an ARM adjustable rate mortgage on either or both loans. The ARM will have a lower monthly premium and allow for additional cost savings, but be sure to refinance the ARM loans if interest rates start to rise.

Obinna Heche: Los Angeles- California

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