Why would you want to refinance your home through the use of 2 mortgages instead of one? There are many reasons why this might make more sense, 2 mortgages versus only 1. A combo refinance loan can be a smart decision if your loan amount is above 80% of the value of what your home is worth. The reason being is because when you are over 80% LTV, Loan to Value (loan amount compared to the value of your home), you will generally be required to pay PMI. You can avoid PMI by doing the combo loan instead of keeping your refinance as a single loan. Ask your mortgage professional for a breakdown of both options, if he/she has not already done that for you so you can see the difference in payments and decide for yourself which route you would like to go.
As of January 1, 2007 PMI is now tax deductible. In some cases having one loan with PMI may be cheaper than having a combo loan with 2 different mortgage payments you will want to have your mortgage broker show you the difference in the two options if available to you. Another reason for having a combo loan is getting a Home Equity Line of Credit(HELOC) with the 2nd loan. Some people like have the safety of a HELOC incase they need to draw money against it if an unforeseen situation may arise.
Combo loans are used when the person knows they can eventually pay off the second mortgage in a short amount of time. A common tactic is a person may want to buy a home prior to thier exsisting one sells. Then after the exsiting home sells the second mortgage on the new property can be paid off.
Ask your mortgage representative to show you a comparison of 1 loan programs with Lender-Paid MI, 1 loan programs with PMI, as well as 80/20 combo programs. Base your loan decision on your particular needs, time frame for remaining in your home, and other factors. For example, if you will be able to pay off your 2nd lien quickly, a combo program may be for you. Your loan representative will be able to tell you the pros and cons of each program, but ultimately the decision is yours to make.
Combo loans also are attractive alternatives when your credit score is in the high 500s to low 600s. You may not be able to qualify for a A paper loan with these credit scores, but there are subprime lenders that will finance you at 100% by using a combo loan program.
PMI stands for Pivate Mortgage Insurance, a premium which you pay on the amount of your loan over 80% on most "prime" conventional mortgages. Combo loans are one way of avoiding mortgage insurance.