Since the second mortgage has a higher rate than the first, the faster the second is paid off relative to the first, the greater the advantage of the combination compared to the single loan. But if the second mortgage is from a different lender and requires a separate closing, the combination will have higher closing costs. This means that the higher the expected appreciation rate, the less the advantage of the combination. Chuck Freedenberg of DecisionAide Analytics and I have developed a calculator, available on my web site, that pulls together all factors affecting the costs of both options on a fixed-rate mortgage. The combination will save you money if the market rate on the second is below the break-even rate.
Closing costs are the same.
The combination is a clear winner. Example 3 is the same as example 2 but the first mortgage has a 15 year term. The borrower is slightly better off with one mortgage. The borrower does significantly better with one mortgage. In general, combination loans are least attractive to low tax bracket borrowers who take out short-term first mortgages, expect early termination of mortgage insurance, and face additional closing costs on combination loans.