November 30th, 2016 | Combo Loan
When purchasing a home, the primary way of avoiding paying Mortgage Insurance (or MI) is by putting a down payment toward the home of 20% or more. This can be a daunting task if there are not enough assets to commit to this amount of money. Paying MI is frustrating because it is money spent that goes toward no part of the equity of your home. MI is designed to protect the lender against loss as loans with less than 20% down are characterized as being of higher risk to the lender. It does not benefit the customer in any way. As a result, customers prefer not “throwing away” their money toward something that does not help them. The old adage “There are plenty of ways to skin a cat” applies to buyers today, though, as there IS a way to avoid paying MI while putting down less than 20%.
The method the last sentence refers to is by doing a combo loan. This is by doing a first mortgage at 80% or less of the purchase price and following it up with a 2nd Mortgage Home Equity Line of Credit (HELOC) for 10% or 15% of the purchase price. The 2nd can also be a standard 2nd mortgage (fixed rate and payments). This lets the buyer put 5% or 10% down rather than committing to the entire 20% down that circumvents paying MI. It also allows the buyer to build equity in their home more quickly as the Equity Line gets paid down.
More and more buyers are electing to go this route because they don’t want to or are unable to put the full 20% down, yet they do not want to pay MI. This loan structuring also is popular for customers who are selling their current home, yet want to move in their new home before their current home sells. By setting the financing up this way, they can put less down on the new home and then pay off the Home Equity Credit Line from the proceeds of the sale on their old home once it sells.
Additionally, if the buyer elects the HELOC as the 2nd (rather than installment 2nd), the equity line can be used again and again (as equity is built) without having to take out another loan. It provides much more flexibility.
The combo loan is beneficial to the client because it provides them options AND allows them to avoid paying mortgage insurance.
Let Bank Of England Mortgage help you with your home buying situation if you fit on one of these situations! A combo loan may be the ideal loan setup for you to get you into that new home without committing to a large down payment or paying MI. Give us a call at 800-669-0191 or email us firstname.lastname@example.org and let us help you today!