Conventional residential mortgages come in various types to suit different buyer needs, financial situations, and preferences. These loans are not insured or guaranteed by any government agency, which often leads to stricter qualification criteria. Here are the main types of conventional residential mortgages:
The interest rate remains the same for the entire term of the loan, which can range from 10 to 30 years. Offers stability and predictability in monthly payments.
The interest rate is fixed for an initial period (e.g., 5, 7, or 10 years) and then adjusts periodically based on a benchmark interest rate. Often starts with a lower interest rate than fixed-rate mortgages but carries the risk of increasing rates and payments in the future.
Allows borrowers to pay only interest for a set initial period, after which they must start paying both principal and interest. This can lead to significantly higher payments after the interest-only period.
Requires low payments for a set period, followed by a large "balloon" payment for the remaining balance at the end of the term. Often used by borrowers who plan to sell or refinance before the balloon payment is due.
Designed for loans that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Typically requires a higher down payment and credit score than smaller, conforming loans.
Follows the guidelines set by Fannie Mae and Freddie Mac, including loan limits. Generally easier to qualify for than jumbo mortgages and often have lower interest rates.
Aimed at borrowers with lower credit scores and higher risk. Usually have higher interest rates and fees to compensate for the increased risk.
Offered by lenders who keep the loans in their own investment portfolios rather than selling them. Can have more flexible qualification criteria but potentially higher interest rates.
Involves taking out two loans simultaneously: one for 80% of the home’s value and another for the balance, minus the down payment. Often used to avoid paying PMI on loans with less than 20% down.
Designed to finance the construction of a new home. Typically converted into a standard mortgage after the home is built.
Each type of conventional mortgage has its own pros and cons, making them suitable for different types of buyers. Borrowers should consider their long-term financial plans and consult with a mortgage advisor to choose the best option for their needs.