Which Conventional Home Loan Is Right for You?
I advise first-time home buyers to meet with a mortgage broker before deciding on a loan because mortgage brokers carry a vast array of products, including the tired and boring old conventional loans. A bank can make a conventional loan, too, but generally a bank's product line is limited and particular only to that bank. Whereas a mortgage broker can broker loans through any number of banks.
After the mortgage meltdown of 2007, many of the exotic types of loans vanished, and conventional loans started to become more popular.
Conventional loans gained a reputation of being a safe type of loan, but there are a variety of conventional loans to choose from as well.
The main difference between a conventional loan and other types of mortgages is the fact a conventional loan is not made by a government entity nor insured by a government entity. It's what we refer to as a non-GSE loan. A non-government sponsored entity.
Types of government loans are FHA and VA loans. An FHA loan is insured by the government and a VA loan is backed by the government. Down payment requirements are different as well. The minimum down payment for an FHA loan is 3.5%. For a VA loan, the minimum down payment is zero.
Amortized Conventional Loans
Home buyers can take out an amortized conventional loan from a bank, a savings and loan, a credit union or even through a mortgage broker that funds its own loans or brokers them. Two important factors are the term of the loan and the loan-to-value ratio:
- 95% LTV with a 30-year term
- 90% LTV with a 30-year term
- 85% LTV with a 30-year term
- 80% LTV with a 30-year term
The LTV can be lower than 80%. It can be whatever is comfortable for a borrower. If the LTV is higher than 80%, lenders require that borrowers pay for private mortgage insurance*. The term of the loan can be longer or shorter, depending on the borrower's qualifications.
For example, a borrower might qualify for a 40-year term, which would lower the payments. A 20-year term loan would raise the payments. Here are a few examples of how the payments can change depending on the term of the loan:
- A $200,000
loan at 6% payable over 20 years would result in a payment of $1,432.86 per month.
- A $200,000 loan at 6% payable over 30 years would result in a payment of $1,199.10 per month.
- A $200,000 loan at 6% payable over 40 years would result in a payment of $1,100.43 per month.
A fully amortized conventional loan is a mortgage in which the same principal and interest payment is paid every month, from the beginning of the loan to the end of the loan. The last payment pays off the loan in full. There is no balloon payment.
Conforming loan limits are $417,000. A minimum FICO score for a good interest rate is higher than those required for an FHA loan. Loan limits above $417,000 are considered jumbo loans and the interest rates are higher.
*Some conventional loan products allow the lender to pay the private mortgage insurance.
An adjustable-rate conventional loan means the loan is adjustable, it can fluctuate. Some loans are fixed for a certain period of time, and then they turn into adjustable-rate loans. Here are three popular types of adjustable conventional loans:
- 3 / 1 ARM. This loan is fixed for 3 years, and then it begins to adjust for the remaining 27 years.
- 5 /1 ARM. This loan is fixed for 5 years, and then it begins to adjust for the remaining 25 years.
- 7 / 1 ARM. This loan is fixed for 7 years, and then it begins to adjust for the remaining 23 years.
Features of an Adjustable Conventional Loan
Many borrowers shy away from an adjustable rate conventional loan and prefer to stick with a traditional amortized loan. For borrowers whose income may go up, an adjustable rate mortgage might be just the ticket to help with the early years of payments.
- The initial interest rate is lower than the rate for a fixed-rate loan.
- There is a maximum amount the loan can adjust over the life of the loan known as a cap rate.
- The interest rate is determined by adding a margin rate to the index rate.
- Adjustment periods can be monthly, every six months, or every year, among other choices.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
Category: Bank loan