 Sam
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 Posted: Sat Apr 03, 2004 12:30 am Post subject: Conventional Mortgage |
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Conventional mortgages are home loans not insured by government agencies like the Federal Housing Administration and the Department of Veteran Affairs. These loans are generally insured by private insurance companies.
There are a variety of conventional mortgages like 15 year and 30 year fixed rate mortgages, 5/25 and 7/23 balloon mortgages, hybrid ARMs like 3/1 ARM, 5/1 ARM etc. Fixed rate mortgages ensure equal monthly payments throughout the loan term. But monthly payments in an ARM remain fixed for an initial period after which it varies as rates fluctuate with time. On the other hand, 5/25 balloon mortgage requires the monthly payments to be fixed for the first five years after which it has to paid off in one single payment. The amount of this payment equals the unpaid loan balance and the interest calculated on the basis of 30 year amortization period.
Conventional mortgages having a loan limit set by Fannie Mae and Freddie Mac are regarded as conforming loans. But home loans exceeding the conforming loan limit are known as jumbo loans.
Features:
- Conventional loans are based on 80% loan-to-value ratio.
- They require a down payment of about 20% so that borrowers can avoid private mortgage insurance. This insurance protects a lender in case a borrower fails to repay the loan within the specified time. Borrowers are required to pay for the insurance premiums along with the interest payments on a monthly basis till there is 20%-25% equity in the property.
- There are conventional mortgages which require about 5% of the home value as the down payment. However there are special programs under which buyers are allowed to accept a gift covering 2% of the 5% down payment required by private mortgage insurance companies. The gift or grant may be received from a friend, relative, or other organizations.
- Conventional loans such as conforming loans are purchased by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac from different lenders. These are then packaged into securities and sold off to investors. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.
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