Conventional Loans
There are two very strong arguments for using a conventional mortgage. First of all, they usually offer the lowest interest rates around for those who want to do a refinance or take out a new loan. Secondly, using a conventional mortgage instead of buying into a property with an FHA loan and only 3 to 5 percent equity means starting with more home equity; this is the best defense against a downturn in the housing market. Recently the market has chalked up declines of 19 percent, as reported by the Standard & Poor's Case-Shiller Home Price Index. By putting 20 percent down, a drop in value of 19 percent-the largest price decline in the history of the Index-still leaves a homeowner with 1 percent equity.
One percent may not seem like much but. If your mortgage is about to go underwater, it can be the difference between one inch of breathing room and death by drowning. With a 97 percent FHA loan, the same price deterioration translates into negative equity of 16 percent--or drowning 16 inches underwater.
Many of today's foreclosures happen because people bought homes with little or no equity. Now they're unable to do a mortgage refinance, and selling doesn't raise enough cash to pay off their principal. While paying a big down payment is hard, at least it doesn't leave borrowers walking on thin ice in fear of losing their homes if prices dip.
What Does Conventional Mortgage Mean?
A type of mortgage in which the underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. About 35-50% of mortgages, depending on market conditions and consumer trends, are conventional mortgages. In other words, Fannie Mae and Freddie Mac guarantee or purchase 35-50% of all mortgages. Conventional mortgages may be fixed-rate or adjustable-rate mortgages.
What Does Conforming Loan Mean?
A mortgage that is equal to or less than the dollar amount established by the conforming loan limit set by Fannie Mae and Freddie Mac's Federal regulator, The Office of Federal Housing Enterprise Oversight (OFHEO) and meets the funding criteria of Freddie Mac and Fannie Mae.