For potential first-time homebuyers, affordability can be a big challenge. In addition to coming up with a down payment and money for closing costs, even being able to afford the monthly payments on a decent home can be a major obstacle.

But suppose you could take a big chunk out of that mortgage payment for the first few years of the loan? Not only that, but eliminate the need for mortgage insurance as well, which typically amounts to an additional interest payment of half a percent a year?

In Massachusetts, low- and mid-income homebuyers have just such an option. It's called the "Soft Second Loan Progam" and it's a great way for first-time homebuyers to reduce their mortgage costs while they're getting established financially. The Cape Cod Commission estimates that the program can increase the homebuyer's purchasing power by as much as 25 percent.

Second loan defers principal, subsidizes interest

Here's how it works. When you buy the home, you take out two mortgages. The first is for 77 percent of the purchase price and is a standard, 30-year fixed rate mortgage. The second is a "soft" mortgage for 20 percent of the purchase that charges only interest for the first 10 years and is subsidized by state funds.

The remaining 3 percent is the down payment, half of which may be covered by a gift from relatives or friends or a grant obtained by the buyer.

In some ways, the program is similar to the zero-down payment private mortgages that were popular before the crash of the subprime mortgage market. In those loans, a borrower would typically take out one mortgage for 80 percent of the loan, then a second at a higher interest rate to cover the other 20 percent. The second mortgage served as the down payment for the first and enabled the homebuyer to avoid having to obtain private mortgage insurance.

In the Massachusetts Soft Second Loan Program, the borrower doesn't have to make principal payments on the second mortgage for 10 years. On top of that, for qualifying homebuyers the interest payments are subsidized, up to 75 percent during the first five years of the loan and then a declining share after that.

Income limits and guidelines

To qualify, borrowers have to meet certain income limits and other guidelines. Borrowers can earn no more than 100 percent of the median average income for their community, which is about $72,000 for a two-person household in Boston and about $47,000 in a community like Springfield. To qualify for interest subsidies, the limit is 80 percent of average median income.

Borrowers must be first-time homebuyers and must use the home as their primary residence. They must also complete a homebuyer education program prior to the purchase and a home safety program within one year after. And if you sell the home after just a few years, you'll have to repay the interest subsidies you received.

The program is a joint public-private initiative of the Massachusetts Housing Partnership (MHP). More information is available through the MHP web site, which also has a list of participating banks through which borrowers can apply.

Similar programs are available in other states, but the Massachusetts program is one of the most prominent. For information on homebuyer assistance programs in other states, check the department of housing or economic development for the state in question.