California Conventional and Conforming Home Loans
By Joseph Hendizadeh
If you're in the market for a
home loan, one of the types of loans you will probably be looking at is
a conventional home loan. Conventional home loans differ from those that
are guaranteed or insured by the federal government, such as FHA
(Federal Housing Administration), VA (Veterans Administration), or the
RHA (Rural Housing Service).
It wasn't too long ago that the only type of
home loan you could get was a conventional home loan. Today, these are
still among the most commonly used loans for those looking to buy a
home.
There are several different types of
conventional loans. Perhaps the most common of these is the fixed rate
mortgage.
With a fixed-rate mortgage, you get the loan
at a certain interest-rate; for the life of that loan, the interest-rate
never changes. Commonly, fixed-rate mortgages are available with 15 or
30-year terms.
A fixed-rate mortgage has the advantage of
allowing a homeowner to have a fixed mortgage payment every month, for
the life of the loan. The monthly mortgage payment is figured out on a
schedule, and the homeowner pays the same mortgage payment, month after
month, for as long as the loan is in effect.
The second most commonly used mortgage is
the Adjustable Rate. Adjustable rate mortgages, or ARMs, became popular
in the early part of the last decade, as more and more homeowners chose
to jump in on the real estate boom and buy homes.
Adjustable rate mortgages appear attractive
because initially, the interest rate on this type of mortgage is likely
to be very low, thus making monthly payments low as well. However, the
detriment to these types of loans is that after a certain period of
time, such as five years, the interest rate "adjusts," usually going
upward. Over the past few years, this “adjustment” left many people
unable to pay their mortgages after a significant interest rate
increase, and caused many people to lose their homes.
In general, adjustable-rate mortgages are
only a good idea if you plan to be in your home for five years or less.
Otherwise, the fixed-rate mortgage is generally the better of the two
mortgages.
I third, less commonly used form of
conventional mortgage is the Balloon. The balloon mortgage allows the
homeowner to pay a specific monthly amount on the mortgage for what is
usually seven years; at the end of that seven years, the rest of the
loan is due all at once, in one lump sum. Whether or not this type of
conventional mortgage is a good idea for you depends on whether or not
you will definitely be able to come up with the money for the lump sum
at the end of the loan term. A balloon mortgage is only a good idea if
you're certain you're going to have the money to make the lump sum
payment at the end of the seven years; if not, opt for a fixed mortgage
if at all possible.
Now that we’ve reviewed types of
conventional mortgages let’s consider the down payment options.
With the recent and ongoing economic
and real estate downturn, it is understandable that there would be a
shift to more rigid requirements from lenders. Gone are the days when
conventional loans could be had with "no money down," or other special
deals. Today, lenders are increasingly taking a close look at those they
give mortgages to, and you'll need to be able to come up with a 10% down
payment at minimum, all at once, or 20% if you don't want to pay for
mortgage insurance.
You can determine how much your down payment
is going to be very simply. Let's say, for example, that the home you
want to buy has a purchase price of $ 200,000. 10% of $200,000 is
$20,000, so that's your 10% down payment. 20% (which you'll want to pay
if you want to avoid having to take out mortgage insurance) is $40,000.
Now that you know common conventional loan
options and down payment requirements, it should make it easier for you
to determine what your next steps should be. For many, home ownership
still remains the American dream. With careful planning, focus and drive
it is a dream that can be achieved.
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