A combination, or “piggyback,” mortgage is simply a second mortgage that closes simultaneously with the first. These mortgages have the effect of enabling higher loan amounts, while at the same time avoiding private mortgage insurance (PMI).

PMI was developed to enable a lender to lend a higher loan-to-value loan. Home buyers who can't afford a 20-percent down payment usually have to pay PMI. This insurance protects the lender in case the homeowner defaults on the mortgage, but it is the homeowner who pays the monthly premium. Also, PMI payments are not tax-deductible.

The use of the combination loan enables a customer to avoid paying PMI because the insured amount of the loan is provided instead by a secondary loan. Furthermore, combination loans are usually more economical because the interest is tax-deductible.

A more useful application of the combination mortgage is the maximization of the rate differential in the market. The market for residential loans is divided between jumbo loans and conforming loans. Jumbo loans are those above a certain dollar amount. Rates on jumbo loans tend to be higher than conforming loans (loans of a lesser amount), because lenders generally have a higher risk with these loans. However, by providing the primary loan as a conforming loan and the balance as a secondary loan, the customer avoids PMI and has a lower rate.

Case Study
A local middle manager had been promoted to Vice President of a foreign company operating in Virginia. This increased his salary 40% per year, which allowed him to finally purchase a home in gated community that he had admired for quite some time.

His company provided a special loan program for its executives. He was eligible for this program and the rate and terms they quoted were less than market rate for a jumbo loan. However, although he qualified for a loan greater than he needed, the down payment he was able to provide was too small to avoid PMI.

Instead, EMA showed the client how he could obtain a conventional loan through a combination of a primary and secondary loan. This allowed the executive to avoid paying jumbo loan interest rates and eliminate PMI. Although the rate on the primary loan was less, the secondary loan rate was 22% higher and the term shorter. However, the total payments were still less than a jumbo loan with PMI, and interest on the secondary loan was tax deductible. As an added bonus, the customer was able to keep from his employer details about his personal finances, which he would have been required to divulge had he utilized the company loan program.