What is a Conventional Loan Mortgage? Conventional loans have been around for many years. With all the different mortgage types the conventional loan mortgage is the most basic. The Conventional loan mortgage follows the funding criteria of Freddie Mac and Fannie Mae and typically have the following characteristics:
- The conventional loan usually requires a 20% down payment.
- With 20% down there is no monthly mortgage insurance payments.
- The term period is usually a 30 or 15 year fixed.
- There is one fixed interest rate for the entire term of the loan.
- Monthly payments remain the same for the entire 30 years.
One of the main benefits of the conventional mortgage option is its stability. The interest rate and monthly payment amounts are decided up front, and they stay the same for the entire 30 years of the loan! Over the period of time of the loan inflation will continue to rise and your monthly mortgage payment will remain the same. That being said one thing you need to keep in mind is property taxes. Although your mortgage will stay the same property taxes are sure to rise. It is something to think about when purchasing a new home.
Conventional Home Loan Requirements
Conventional home loans are a great option and most of the time a person should try to strive to get a conventional loan. However the challenge of a conventional mortgage is the larger down payment needed. Conventional conforming loans require a larger down payment than many other loan program. For example for a 20% down payment of a property that costs $200,000 dollars you would have to come up with $40,000 thousand dollars. Not to mention money for closing costs. On average closing costs is about 3% of the purchase price which in this case would be another $6,000. Unfortunately most people do not have this kind of money to put down on a home. Fortunately there are other loan programs that do not require the full 20% down. But if you can afford to put 20% down you will be in great shape in the long run.
Shorter Term Conventional Loan Mortgage
If you take out a 15, 20, or even a 25 year loan, you will save a bundle in interest over a 30 year conventional mortgage. Interest rates on a 15 year fixed rate loan are also lower than a 30 year fixed. The down side is your monthly payments will be a higher. If you can swing it this is the best way to go, you will pay less interest and more principal resulting in owning your home much quicker than a longer amortization period loan. The sooner you can own your home completely that grass in your front yard will feel under your toes.
Pros and Cons of a Conventional Loan Mortgage
Pros: Conventional mortgage loans tend to close quicker than other government run loan programs. This is because conventional loans require less red tape, are credit driven and require a higher down payment. With a conventional fixed rate loan you will know what your payments will be monthly and that will never change for the life of the loan.
Cons: Since Conventional loans are credit driven you will need to have really good credit for the best interest rates. Also most mortgage lenders require a larger down payment than other government loan programs.