Conventional loans may offer down payment options as low as 3% of the purchase price. If the down payment is below 20%, lenders will require borrowers to pay a monthly payment toward private mortgage insurance (PMI) until the loan becomes eligible to drop PMI at 80% LTV.

Mortgage insurance is typically required on conventional loans where the down payment is less than 20% of the purchase price. This insurance is designed to protect the lender if the loan goes into default. Mortgage insurance rates can be affected by credit score and loan-to-value ration (LTV). PMI is usually paid as a monthly fee. However, you may opt to pay it as an upfront fee or request a slightly higher conventional loan interest rates to cover the PMI cost.

Here are two ways to eliminate PMI:

1) Once you have at least 20% equity in your home, you make a request to your loan servicer to drop your PMI. This may require obtaining an additional appraisal. Otherwise, PMI automatically drops off once you hit 22% equity unless the loan is for a second home or investment property. For these type of properties, the PMI may remain in place for the entire life of the loan.

2) Explore ways to avoid PMI altogether through down-assistance payment programs or alternative loan structures. For example, using a “piggyback mortgage” may allow for a lower down payment while simultaneously avoiding PMI.

“Conforming” conventional loans that are backed by Fannie Mae and Freddie Mac must not exceed $647,200 (up from $548,250 in 2021). In many parts of the country, this limit may be higher. For instance, Fannie Mae and Freddie Mac allow a loan amount up to $970,800 in certain state counties (up from $822,375 in 2021).

Loan limits are set by the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie. Loans that exceed the limits of Fannie and Freddie are considered non-conforming and may qualify under a Jumbo mortgage.

A non-conforming conventional loan doesn’t meet the loan limits and/or eligibility requirements of Fannie Mae or Freddie Mac. A loan that exceeds the Freddie and Fannie loan limits may fall into the Jumbo Loan category, which is another type of conventional loan.

Fixed-rate and adjustable-rate mortgages (ARMs) are two mortgage product types.

A fixed-rate mortgage has an interest rate determined when you take out the loan which will never change. While insurance and taxes may fluctuate, your principal and interest payment does not. This makes budgeting easy, as your principal and interest mortgage payment is predictable and won’t change over the years as conventional loan interest rates move.

An adjustable-rate mortgage has an interest rate that’s fixed for a set period of time (e.g. 5, 7 or 10 years) but then adjusts at agreed-upon intervals. The interest rate may go up or down. For example, a 5/1 ARM will have an initial interest rate for five years and then adjust every year thereafter based on an index and a margin.

Discount points enable you to pay interest upfront in exchange for lower conventional loan interest rates over a loan’s lifetime. Generally, for each point paid, you’ll receive a ¼ point reduction in your rate. If you’re looking to stay in your home for a longer period, then paying points to lower your rate may make sense for your situation.

The most common loan terms are 30, 20, and 15 years.

Many people choose a 30-year mortgage because it offers the lowest monthly payment. However, in return for a lower monthly payment, you’ll pay more in conventional loan interest rates over the life of your loan. While monthly payments for shorter term mortgages may be higher because the loan is being paid off in a shorter period, you’ll pay significantly less in interest over the course of the loan. Shorter-term mortgages usually offer a lower interest rate so more of your monthly payment is applied to paying down the principal. Therefore, shorter term mortgages cost significantly less overall.

Fannie and Freddie are private shareholder-owned corporations that were chartered by Congress to support a. Fannie and Freddie are private shareholder-owned corporations chartered by Congress to support the U.S. housing market and are commonly referred to as “government-sponsored enterprises” (GSEs). Their role is to purchase mortgages from lenders to provide liquidity, stability and affordability in the mortgage market.

The Federal Housing Administration (FHA) is a government agency that insures loans for borrowers that typically have lower credit scores and lower to moderate income. Eligibility requirements for FHA loans may be less stringent compared to conventional loans purchased by Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac require at least 3% equity. If you’re doing a cash-out refinance, then you’ll need at least 20% equity in your home. Adjustable-rate refinances usually require at least 5% equity.