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A combo mortgage, also known as a piggyback mortgage, is a method used by lenders to assist borrowers in avoiding private mortgage insurance (PMI) premiums. For a basic understanding, I should remind you that PMI is charged on any conventional mortgage where the loan amount exceeds 80% of the value of the property. (Value is defined as the lesser of the sales price or appraised value.) Many years ago, most standard mortgage loans required from the borrower a minimum down payment of 20% of the price of the home. The most a bank or savings and loan would be willing to lend was 80%, with the borrower investing 20% of their own funds. Time has greatly improved this situation. Lenders and specialized insurance companies got together to determine a method for lenders to safely lend more than the typical 80%. The solution was to have these specialized insurance (PMI) companies insure the lender against loss on the funding which exceeded 80%.

The borrower would pay the cost of the PMI premiums in exchange for the privilege of borrowing more than 80%. The amount of the monthly required premium increases as the amount of the down payment decreases. That is, the less your down payment, the greater the insurance premium. The amount of the PMI premium can range from about the same amount as the homeowner’s insurance portion of the escrow to as much as or more than the real estate tax portion of the escrow payment. So you can understand that it is a pretty significant amount of money that might be saved.

A combo or piggyback loan is the making of two loans at the same time on the same property. For example, suppose that a borrower has only 5% in down payment funds available to go towards the purchase of their new home. Ordinarily, a single loan of 95% of the sales price would be made and private mortgage insurance would be required as this loan to value exceeds the 80% threshold for PMI. Suppose that instead of granting a single mortgage to this borrower, two loans were made. The first and primary mortgage could be made for 80% of the sales price and a second and junior mortgage could be made for the remaining 15% of the sales price. The beauty of this arrangement is that no PMI premiums would be charged because the first mortgage is under the 80% threshold. And in addition, all the interest that is paid on both the first and on the second mortgage would normally be deductible for income tax purposes (contact your tax professional for tax advice specific to your situation).

Other combo scenarios involving at least a 5% down payment are also possible. For example, you could do a 75% first mortgage, a 20% second mortgage and a 5% down payment. Or you could do an 80/10/10 where the first is 80%, the second is 10% and the down payment is 10%. What has recently become radically less possible to obtain is a combo loan without any down payment. Up until about a month ago, lenders were able to do 80/20 or 75/25 combo mortgages, which combined to finance 100% of the purchase price. Now those investors, who were previously comfortable in making second mortgages to purchasers who did not themselves contribute any down payment funds, have gotten cold feet. They may decide to get back into this type of lending at some point in the future, but at the moment, combo loans totaling 100% are scarce as hen’s teeth.

The bottom line is to explore and understand the range of mortgage financing options available to you in the current environment. My suggestion is to get a little face time with your local professional mortgage lender. Be sure to seek out a member of the local Mortgage Bankers Association of Middle Georgia by visiting www.mbag.org. Mortgage Bankers Association members subscribe to a standard of conduct and ethics that might be missing elsewhere.

David Griffin has been financing homes in Macon, Warner Robins and all of Middle Georgia since 1983. He is a two-time past president of the Mortgage Bankers Association of Middle Georgia. For an archive of past articles visit www.davidjgriffin.com. (9/27/07)