Conventional Loan
A conventional loan is not offered or secured by a government entity; however, they can be guaranteed by both Fannie Mae and Freddie Mac, two government sponsored enterprises. This loan could be your perfect fit if you have great credit and can afford a large down payment (although a large down payment is not always required but can help you eliminate paying private mortgage insurance). Whatever your long- or short-term goals are, a conventional mortgage can help you meet them.
Fixed-rate vs. adjustable-rate mortgages
With a conventional loan, you can choose from a fixed-rate mortgage or an adjustable-rate mortgage also known as an ARM. Here’s how the two differ:
Fixed-rate mortgages
With a fixed-rate mortgage, your mortgage interest rate and payments will be consistent throughout the duration of your loan. You can rest assured knowing your interest rate won’t increase alongside market rates. You may also benefit from refinancing later if market rates decrease. Fixed-rate mortgages are available in a variety of term lengths ranging from 10 years to 30 years.
Adjustable-rate mortgages
An ARM can save you money on your loan, especially if you’ll be living in the home for only a few years. ARMs are available in a variety of configurations and term lengths, with the most common being 5/6, 7/6, and 10/6. The first number in these scenarios represents the number of years your interest rate will remain fixed. The second number represents the period of time in months where your interest rate could change after the fixed period expires. This is called the adjustment period.
Rates may increase or decrease during adjustment periods and make your monthly payments higher or lower respectively. However, there are caps set on ARMs to protect against rate increases.
What is a conventional loan?
A conventional loan is any mortgage not insured or guaranteed by the government. These mortgages adhere to Fannie Mae and Freddie Mac’s standards, such as conforming loan limits.
Are conventional loans assumable?
Usually, no. Conventional loans typically contain a due-on-sale clause, allowing the lender to demand the remaining loan amount once the property is sold. This means it cannot be assumed except for certain circumstances like death or divorce. However, if your conventional loan includes an assumption clause, it may be assumable.
FHA vs. conventional, what’s the difference?
FHA loans are backed by the Federal Housing Administration (FHA) and offered by FHA-approved lenders. Conventional loans are not insured or guaranteed by a federal agency. Important differences between these two home loans include:
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FHA loans are generally easier to qualify for than conventional loans
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Mortgage insurance may be mandatory for the life of an FHA loan but is only required with less than a 20% down payment with conventional loans (and can be canceled later)
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FHA loans are only for primary residences, while conventional loans can finance primary residences, second homes and investment properties
