Posts Tagged ‘equity’

Pros of a conventional mortgage loan

A conventional mortgage loan is a type of home loan that meets certain standards set by the United States government. These type of home loans however are not guaranteed or insured by the government. conventional loans are basically any loan that is not an FHA loan or a VA loan. About 35% to 50% of mortgages each year are conventional mortgages.

Conventional mortgages allow for more financing options over VA and FHA loans. Fore example not only do they offer fixed rate mortgages but there are also various adjustable rate mortgages (ARM) and biweekly payment options available.

Because conventional loans have less strict guidelines they offer many other advantages such as underwriting flexibility, cheaper loan fees, less collateral, more lenient appraisal guidelines, and possible lower closing costs.

If a lender decides to keep the loan in their own portfolio they can offer more underwriting flexibility. Since the loan won’t be sold in a secondary market those guidelines won’t have to be met. This makes getting a loan easier with less than perfect credit.

Lenders may also discount certain loan fees or even waive them in certain cases. Since the lender will be keeping your loan they may discount loan fees in order to get your business.

Conventional loan lenders will sometimes let you use other items in the house as collateral. For example including appliances and furniture may be an option.

FHA and VA loans require strict appraisal guidelines. Conventional loan appraisals are much more flexible and only have to meet the lenders restrictions.

Finally, sometimes lenders will pay a portion or all of the closing costs of a conventional loan in exchange for a slightly higher interest rate. This allows someone who doesn’t have a lot of cash on hand to still purchase a home with less out of pocket money.

As you can see there are many advantages to conventional mortgage loans. Before you decide which type of loan to choose review all of your options. Everyone has a different financial situation so a conventional loan may not be your best option. Research other types of loans before making the final decision.

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is basically a third party insurance policy that covers a lenders risk when the buyer doesn’t have at least 20% equity in a home. So if you don’t pay down 20% or you don’t purchase your home for 20% less than what it appraises for then you will usually be required to pay private mortgage insurance or PMI.

The creation of PMI has allowed many buyers to purchase homes that normally would not be able to own their own home. For as little as 3% to 5% down potential buyers can purchase a home without having to save for a large down payment.

One important aspect of PMI you should always keep in the back of your mind is that once you have 20% equity in your home you are no longer required to pay this insurance policy. Some lenders require this 20% to be from the original purchase appraisal and others will allow a new appraisal amount at the current time. This is a big benefit if your home has increased in value over a short period of time. Usually you will have to contact the lender once you have 20% equity in your home in order to cancel the PMI. However, usually lenders are required to automatically terminate PMI once you have paid down the mortgage to 78% of the original apprasial value.

There are ways to avoid paying PMI. The first and most obvious is by paying down at least 20% of the loan at the time of purchase. The second method is a piggy back loan or taking out a second mortgage at the time of purchase. Before you choose an option consider the pros and cons of each type of loan.