Combination Loan

Officially, a combination loan consists of two mortgages taken out by the same person from the same lender. It may seem silly to take out two mortgages this way. (Why not just take out one big mortgage?) It's really a single product that's structured as separate loans, because that setup makes sense in particular situations.

For instance, combo loans are often used in home construction. The first loan is used to build the house. Then, once the house is built, it's replaced by a typical mortgage loan.

Combination loans also get used to lower down payments. A popular version of this is called the 80-10-10 mortgage. In this scenario, the home owner makes a 10% down payment for the house (typically, banks look for a 20% minimum down payment, unless it's 2006 and the mortgage industry has turned into a Wild West speculation machine). Then a conventional mortgage is taken out for 80% of the home's purchase price. Finally, the last 10% is paid for by a second mortgage.

The goal of this product is to lower the likelihood that the homeowner will have to buy private mortgage insurance, which is often necessary with lower down payments.