What are conventional loans?
Mortgages, also known as conventional home loans, are used to finance the purchase of a house for people who cannot pay for a house entirely with cash. The majority of homes bought in the U.S. are financed through mortgages. As such, it helps to know the definition of key mortgage terms, details about rate offers, tax, ownership benefits, and down payment details that can help to choose the proper mortgage for any interested home buyer.
A conventional mortgage loan has several key components:
- loan term: typically 10 to 30 years
- the amount loaned, or principal
- interest rate(s) applicable to the principal
- tax benefits
- home equity benefits
- down payment requirements
The loan term is agreed upon signing and specifies the maximum time permissible to repay the mortgage without additional fees and penalties assessed by the lender. Note that many mortgage lenders do not have a prepayment penalty. Therefore, making more aggressive monthly payments or extra payments can reduce the loan term since a mortgage loan is considered closed when the principal and any extra fees, if applicable, are paid in full.
The principal loaned is the maximum amount that can be used to purchase a house. The actual home purchase price will be recorded in the loan paperwork and interest rates specified by the mortgage will apply to that purchase price.
A single interest rate can be specified for the loan lifetime. This is called a fixed-rate mortgage and it is the most conventional and predictable form of a mortgage. Variable-rate mortgages base their rates on underlying “prime rates” set by government banks, a specific U.S. Treasury bond, or a similar benchmark that can, and most likely will, fluctuate during the loan lifetime.
Many have heard of the mortgage interest deduction. At tax time, people have the option to itemize their deductions instead of taking the standard deduction. If interest on a home loan, combined with other applicable expenses, exceeds the standard deduction, a homeowner with a mortgage would be well served to itemize deductions and lower their tax burden.
As a mortgage is paid off, the borrower gains more and more equity in the home. Upon completely paying off a mortgage, the homeowner has full ownership of their property and no more mortgage payments. In contrast, a renter has to pay indefinitely and does not gain the benefit of ownership, such as selling or renting out the property for a profit.
Why you should consider a conventional loan
Conventional mortgages usually require a down payment. This initial payment may seem imposing, but in fact, it lowers the overall mortgage cost since less of a home purchase has to be financed through interest-accruing mortgage funds.
To summarize, mortgage loans are a great financial tool that has catapulted many people towards the enduring rewards of home ownership. Mortgage experts at United Direct Lending are happy to match your ambitions of home ownership with a mortgage that works for you.