With interest rates kept at record lows, many Americans are planning to buy a house or refinance their mortgages. To make the best possible decision, weighing the loan options available today is a must. Among all the options, a conventional loan offers unique features that can benefit various situations and put many individuals on a solid foothold toward homeownership.
Below are eight points that present the benefits of a conventional mortgage loan.
- Lower Interest Rates: Compared to other types of loans, such as FHA and VA loans, a conventional loan allows lenders to adopt different rules that fit specific circumstances. How can this be beneficial for the consumer? While banks provide nearly identical costs for certain types of loans, the fees associated with conventional loans can vary greatly from one lender to another. By shopping around, not only can a borrower find a lower interest rate; he can also negotiate the closing costs to get a better deal. In addition, conventional loans are fixed-rate loans, which means that the interest remains constant over the life of the loan.
- Financial Concessions: Although a conventional mortgage loan may have a higher interest rate compared to other loans, lenders can offer potential borrowers a series of concessions to help them overcome individual financial difficulties.
- Flexible repayment schedule: Conventional lenders make available several repayment plans, such as 10, 15, 20, 25, and 30-year plans. The shorter the repayment time frame, the lower the interest rate will be.
- Instant home equity: Most conventional lenders require a 20-percent down payment (e.g. $30,000 on a $150,000 property). Though many people cannot afford to make a lump-sum payment totaling several thousands of dollars, a 20-percent down payment puts a substantial equity into the property as soon as the borrower signs the documents. What happens if a home buyer doesn’t have the 20-percent down payment? Unlike other lenders who penalize borrowers for making low down payments, conventional lenders don’t apply any penalties. As a matter of fact, the minimum down payment required for most conventional mortgages is five percent of the house value ($7,000 on a $150,000 property), which is quite affordable. Since there are no penalties, the costs of a conventional loan remain the same, regardless of how much money a borrower puts down.
- Flexible Private Mortgage Insurance (PMI): If a borrower cannot afford to make a 20-percent down payment on a house, he will have to pay PMI. But conventional loans allow home buyers to choose when and how they want to pay mortgage insurance. For instance, a borrower can pay PMI upfront, as a single lump sum at closing, or make annual or monthly payments.
- Automatic PMI Termination: If the borrower chooses to make a premium payment every month, the lender must terminate the mortgage insurance when the loan balance reaches 78 percent of the original value, according to the Homeowner’s Protection Act of 1998.
- Lower Closing Costs: A conventional loan has fewer requirements than other types of loans, being easier to prepare. This means that the borrower must cover lower closing costs, which often include origination fees, legal fees, appraisal/home inspection fees, discount points (if applicable), title insurance, and escrow deposit.
- Straightforward Comparison: No matter how many conventional loan offers a borrower receives, he can easily choose the best option by comparing a few elements, such as the interest rate and repayment schedule.
Conventional mortgage loans are offered by private lenders. While this may offer more room for negotiation, a conventional loan can include additional clauses, such as prepayment penalties. To be on the safe side, a home buyer should read the contract very carefully before signing it.