The national average sales price of a home in the U.S. is $503,800 as of this writing, according to the U.S. Department of Housing and Urban Development.* In this example, you’d need to put down $100,760 (20%) to avoid having to pay private mortgage insurance (PMI). PMI is insurance designed to protect the lender in case a borrower defaults on the loan. And you must pay PMI until your home equity reaches 20% of the original value of your home.
When purchasing a home, navigating mortgage options can feel overwhelming. One option that many buyers overlook, yet can offer financial benefits, is a combo loan. This financing strategy combines two loans to help you secure better terms, avoid extra costs, and maintain flexibility. Here’s a closer look at five advantages of a combo loan and why it might be a smart choice for your next home purchase.
What is a combo loan?
As the name implies, a combo loan combines two loans (a primary loan and a secondary loan) to help you purchase a home. A combo loan typically consists of:
- 100/0: 100% financing with no down payment.
- 80/15: 95% financing with a 5% down payment.
- 80/10: 90% financing with a 10% down payment.
This structure enables you to finance up to 100% of the home’s value without relying solely on a single large mortgage.
Advantages of a combo loan include:
1. You avoid private mortgage insurance (PMI).
One of the most attractive benefits of a combo loan is the ability to avoid private mortgage insurance (PMI). Traditional home loans with a down payment of less than 20% typically require PMI, which can add hundreds of dollars to your monthly mortgage payment. By splitting the financing into two loans, the primary mortgage remains at or below 80% of the home’s value, bypassing the PMI requirement and saving you money each month.
How much does PMI cost? Here’s an example. Let’s assume the home you wish to buy is $503,800. You put 10% down ($50,380); the interest rate on your 30-year loan is 6.83%, and you have a credit score of 760 or better. You’d have to pay $174 a month in PMI on top of the mortgage and homeowners insurance. And you’d pay $17,071 over a bit more than 8 years before you reached 20% equity and could stop paying PMI.**
2. Lower overall interest costs.
The secondary loan in a combo loan is often a home equity loan or HELOC, which may offer competitive interest rates, especially if structured correctly. By keeping the primary loan within conventional loan limits (currently $806,500 in most areas; greater in higher-priced areas), you may secure a lower interest rate on that portion of the loan, reducing overall borrowing costs over time. We’re offering fixed-rate home equity loans as low as 6.99% APR† when you sign up for Direct Deposit. And our HELOC rates are as low as 7.49% APR.
3. Smaller down payment requirement.
With a combo loan, you can put down as low as 0% rather than the full 20% required for a conventional loan without PMI. This can make homeownership more accessible, especially if you’re a first-time buyer or if you prefer to keep more cash on hand for emergencies, renovations, or investments.
4. Greater flexibility in loan terms.
Because the second loan is separate from the primary mortgage, you often have the flexibility to choose different repayment terms. For instance, some lenders allow the second loan to be structured as an interest-only HELOC for the initial years, keeping payments lower during the early stages of homeownership.
5. Potential tax benefits.
Depending on your financial situation and prevailing tax laws, interest paid on both the primary mortgage and the secondary loan might be tax-deductible. Always consult a tax advisor to understand the specific deductions available to you.
Is a combo loan right for you?
While combo loans offer notable advantages, they aren’t suitable for every buyer. Managing two separate loans requires discipline, and HELOC rates are often variable, potentially increasing over time. You should carefully evaluate your financial stability and long-term plans before choosing this route.
Final thoughts.
A combo loan can be a strategic financing tool for homebuyers seeking to avoid PMI, reduce upfront costs, and secure more favorable loan terms. By understanding how this combo loan works, you can make more informed decisions and potentially save thousands of dollars over the life of your mortgage. Consider discussing the combo loan option with one of our mortgage experts to see if it aligns with your homeownership goals.
*Federal Reserve Bank of St. Louis. “Average sales price of houses sold for the United States,” Published 23 April 2025. Accessed 15 July 2025.
**Lewis, Holden, “PMI Calculator: How much is mortgage insurance?” Nerdwallet.com. Published 26 June 2025. Accessed 15 July 2025.
†APR = Annual Percentage Rate. APR is the annual rate of interest that is paid on an investment, without taking into account the compounding interest within that year. Rates are subject to change at any time.
1.00% rate discount is for a minimum of $1,000 monthly ACH Direct Deposit or Agent Net Check into a Farmers Insurance Federal Credit Union Checking Account and Automatic Payment/Folio Deduction as a repayment method to qualify. Rates are subject to change at any time.
There is a $500 refinance fee for Home Equity Loans booked within the last 12 months, unless $20,000 new cash is added to the loan request.
