Conventional Loans
Conventional Loans:
The most common conventional loan is amortized over 30 years, though others programs exist from 15 to 50 years. Historically you’ve needed a 20% down-payment to qualify but most lenders now offer two types of alternatives.
- High Loan To Value (LTV) – some lenders offer 85% to 95% financing in one loan. However, because this type of loan is considered risky, you will probably have to pay a higher interest rate and PMI or MIP (Mortgage Insurance). This an insurance policy that covers the lender, NOT YOU, in the case of default. Often you will pay an upfront fee as part of your closing costs as well as monthly payments until your loan reaches 78% of current market value. Occasionally you might see “Lender Paid PMI” as part of a promotion. If that is the case, trust that you are paying higher closing costs or a higher interest rate – those fees must be accounted for somewhere.
- 80% First Mortgage with Home Equity Line of Credit (HELOC) – To avoid paying PMI, some lenders may offer an 80% First (or Primary) loan supplemented by a 5% to 15% HELOC. In this case, you will typically pay two separate monthly bills. Because HELOC rates are typically tied to the (now low) federal prime rate, these loans are becoming more popular. Here are a few things to keep in mind when considering this type of loan:
- HELOC rates can and do fluctuate.
- HELOC interest payments are typically tax deductible, but that hasn’t always been the case – the policy could change.
- HELOC payments amortize much like a credit card; minimum payments may not reduce principal balance.
- There may be yearly membership fees or pre-payment penalties on HELOCs.
