Conventional Loan
What is a Conventional Loan?
A conventional loan is a mortgage loan that’s not backed by a government agency. While some government-backed loans provide unique benefits to homebuyers, conventional loans remain far and away the most common type of mortgage.
Types of Loans
There are all kinds of loans on the market. The two main types are fixed loans and adjustable loans. Fixed rate options keep the same interest rate for the entire duration of the loan, and will not fluctuate from month to month or year to year. Adjustable rate mortgages are just that – they adjust at predetermined intervals over time, but with a lower beginning interest rate than fixed loans. Fixed rate loans afford the borrower security and stability – though they will start higher than adjustable mortgages.
Fixed Rate Mortgages
These tend to be one of the most popular choices for any first-time buyer with lenders for first time buyers offering them to those planning to stay in a house for the long-term or duration of the home loan.
Adjustable Rate Mortgages
This option is best for a buyer who plans to stay only a few years in the property, in that for the first few years the loan has a lower interest than that of fixed rate mortgages. Adjustable rate loans do carry risk though – if the value of the house plummets and your mortgage interest rates increase dramatically you may not be able to refinance or sell the home.
Balloon Mortgages
Balloon mortgages have much shorter terms and begin with a fixed rate of regular payments and fixed interest rates for a predetermined period of time. After this it “balloons” and the rest of the remaining balance is payable with a one-time payment at the end of the loan term. Though this sort of loan entails lower interest rates in the initial years, it requires the borrower to gamble that they will have the funds to make the large payment at the end of the loan period, which often hinges on their financial situation remaining stable, or the property maintaining its value.
In Addition...
In addition, there are conventional loans – which are not guaranteed by the government – and options such as Federal Housing Administration (FHA), Veterans Affairs (VA), and Department of Housing and Urban Development loans (HUD), which may be an option for borrowers who qualify.
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