Sometimes two is better than one. On behalf of our client, we obtained a combo loan — consisting of two loans — for the purchase of a $1 million single-family residence in Miami Beach, Florida.
Also known as a combination loan or piggyback loan, a combo loan is when the borrower takes out two separate loans for the same property.
Here, we secured our client a first mortgage loan for $510,400 at a 30-year fixed interest rate of 3%. We purposely set the loan amount of the first mortgage at $510,400 to avoid the loan being classified as a jumbo loan. In most counties, a loan amount of at least $510,401 on a single-family residence is considered a jumbo loan. (Please note that the limits may vary from year to year. For example, in 2021, the limit increased from $510,400 to $548,250 for single-family residences. For the most recent conforming loan limits, visit the Federal Housing Finance Agency’s website here.)
On top of the first loan, we also secured our client a second-position home equity line of credit (HELOC) for $350,000.
Therefore, our client received a combined loan-to-value (CLTV) of 86%.
This dual structure gave our client several advantages:
- SPEED: By keeping the first loan below the jumbo threshold, we were able to stay within Fannie Mae and Freddie Mac’s maximum loan limits and obtain a conventional, 30-year fixed loan. As a conventional loan, the underwriting process was automated. Had it been a jumbo loan, the underwriting would have been manual, which is more stringent and time-consuming. Given the stricter lender requirements for jumbo loans, particularly due to the COVID-19 pandemic, many borrowers would not even qualify, let alone pass the underwriting hurdles.
- LOWER BLENDED INTEREST RATE: Had our client taken out one single jumbo loan, their interest rate would have been higher than the blended interest rate we obtained (i.e., the average of the interest rate on the first loan and the interest rate on the HELOC).
- NO PRIVATE MORTGAGE INSURANCE (PMI): If the loan-to-value (LTV) on a conventional loan is more than 80%, the lender offsets that risk by requiring the borrower to pay for PMI, a type of mortgage insurance that protects the lender in case of a default. Here, because we kept the LTV on the first loan at only 51%, PMI was not necessary, a significant monthly savings for our client.
- FINANCIAL FLEXIBILITY OF A HELOC: The $350,000 HELOC will give our client, a family of four, the financial flexibility to draw down on the funds whenever needed for whatever purpose. Interest is only paid on what is drawn.
Therefore, when shopping for your home, keep in mind that creative loan structures are possible to achieve not only the ultimate goal of landing your dream home, but also other added perks such as faster underwriting, a lower blended interest rate, no PMI, and the financial flexibility of a HELOC.