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Hi Jake ~

You have a comprehensive knowledge of combo loans already, so you must be a regular lurker. :-)

I take out 2 loans and each has a different interest rate. The overall rate is higher than a traditional 5% down, finance 95% loan, but the monthly payments are cheaper or there are better tax advantages because PMI is not deductable...

Correctomundo! What you have referred to as the "overall rate" we refer to as the "blended" interest rate. Combo loans are available in different terms; that is, the 1st TD can be an FRM (fixed rate mortgage) or an ARM (adjustable rate mortgage) and the second can be an FRM, an ARM or a HELOC--a regular alphabet soup of loans!

I always try to find the narrowest interest rate spread between the 1st and the 2nd that I possibly can. My personal best is .75, but that was just a fluke--the guy at the lock desk was quitting and he gave me a deal since he had no one to answer to! A typical rate differential is 1.25--1.50.

The most important questions to ask yourself regarding rate and term are "how long do I anticipate holding this loan?" and "what is my tolerance for interest rate risk?"

I recommend the Mortgage Professor's site for discussions about ARM vs. FRM, points, etc. Lots of questions answered there in the Professor's inimitable no-nonsense style.

Catherine Coy
Mortgage Broker
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