A conventional mortgage loan is a home loan that’s not backed by the US government. Conventional loans are guaranteed by Fannie Mae and Freddie Mac. Fannie Mae and Freddie mac are federally backed companies that buy and guarantee mortgages issued through lenders in the secondary mortgage market. If you plan to use a conventional loan to complete a home purchase or refinance, you’ll most likely have a down payment of at least 3% of the purchase price. However, if your down payment is less than 20% of the purchase price you’ll likely need to pay for private mortgage insurance (PMI). PMI protects your lender by reducing their risk and allows them to provide loans for buyers with lower down payments.
Conventional mortgages offer fixed rates that don’t change which allows a borrower to know how much their principal and interest payment will be each month. Conventional loans also offer ARMS (Adjustable-Rate Mortgage) for qualifying borrowers. An ARM typically has a lower starting interest rate than a 30-year fixed mortgage, but that rate can change (or adjust) during the course of loan term (usually annually) and may be a good option for someone who will be keeping their mortgage for a shorter period of time.
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