Bucking convention might be your calling card, but the words maverick and mortgages do not inspire confidence. Convention never looked so good in uncertain economic times, and conventional mortgages put you on a solid foothold toward homeownership. You must meet certain requirements to benefit from conventional mortgages, though, so planning ahead and budgeting carefully is important.
Conventional mortgages are loans underwritten and insured by private lenders and investors. Unlike FHA or Department of Housing and Urban Development loans that receive backing and insurance from the government, conventional mortgages put the lender at risk in case you default on the loan. Because lenders do not have a safety net for conventional mortgages, requirements stricter for these loans.
Down Payment and Equity
Because you meet the strict requirements for conventional loans you get a head start over other buyers with lesser qualifications. Lenders usually require a 20 percent down payment on the house, so you already have equity in the home at the time you sign the loan documents. Equity is the portion of the home that you own outright. It helps you if you need to sell during housing down turns. If you owe more on a house than it is worth, you could end up trapped in a house you do not want or cannot afford.
Conventional mortgages are usually fixed-rate products, meaning that once you "lock in" to an interest rate, you keep it for the life of the loan. Your payments stay the same month to month, whether interest rates climb or housing prices fall. Even if interest rates fall far enough to make refinancing tempting, you have flexibility with a conventional mortgage because you already have met the tough requirements to get the mortgage, and barring a drastic change in your financial circumstances, you likely can refinance to take advantage of lower rates.
The stability of a conventional mortgage gives you that same stability in your economic future. Saving up an emergency fund in a savings account further adds security to your finances. You trade off some flexibility for predictability in a conventional mortgage, because you must make the exact payments every month and because you must refinance to take advantage of falling interest rates. Always check the APR, or annual percentage rate, listed next to the advertised interest rate because it reflects what you pay after the lenders add on the fees associated with the loan.
- Photodisc/Photodisc/Getty Images