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Financing Your Home Purchase With Conventional Loans

Updated: Feb 21, 2020

A conventional loan is a mortgage that isn't backed or insured by any parts of government, including the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA). The loan terms and rates are usually fixed. Conventional loans require credit scores of at least 620-640.

Borrowers with higher credit scores are offered the ability to make lower down payments and receive the most beneficial conventional mortgage rates. With lower down payments specially less then PMI can cost between 0.5% to 1% of the entire loan amount annually. That means one could pay as much as $10,000 a year—or $833.33 per month—on a $1,000,000 loan, assuming a 1% PMI fee. Pros/Cons

When it comes to PMI, if you have less than 20% of the sales price of a home to use as a down payment, you have two options: Purchase with what you have available to put down on a first mortgage and pay PMI until the loan to value of the mortgage reaches 78%, at which point the PMI can be eliminated. Use a second mortgage. This will usually result in lower initial mortgage expenses than paying PMI.Consider a second mortgage typically carries a higher interest rate than the first mortgage, and can only be removed by paying it off or refinancing both mortgages into a single new mortgage, presumably when the LTV reaches 80% or less (so no PMI will be required). Also Consider The Below Options from when weighing 1 mortgage or 2 mortgages on a property:

Compare the possible tax savings associated with paying PMI versus the tax savings associated with paying interest on a second mortgage. The 2017 tax law has changed the limits on mortgage interest deduction, so check with an accountant concerning your financial situation. Compare the cost of a new appraisal to eliminate PMI vs. the costs of refinancing a first and second mortgage into a single stand-alone mortgage. Note the risk that interest rates could rise between the time of the initial mortgage decision and the time when the first and second mortgages would be refinanced. Check the different rates of a principal reduction of the two options. Note the time value of money (the idea that money you spend now is worth more than the same amount in the future). However, the most important variable in the decision is the expected rate of home price appreciation. If you choose a stand-alone first mortgage that requires you to pay PMI – instead of getting a second mortgage with no PMI – how quickly might your home appreciate in value to the point where the LTV is 78%, and the PMI can be eliminated?

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Brian Erhahon CEO/Founder Real Estate Service Pros / Keller Williams Realty Cell: 714-684-6687 Lic #01888708 Click Here To Download Our Mobile Real Estate Search App

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