A conventional mortgage is usually a fixed mortgage, which means the interest rate and amount of each monthly payment are fixed. Conventional mortgages are traditionally not insured or guaranteed by any agency, although now private mortgage insurance is available to insure losses in the event of a default.
The Basics of FHA and VA Mortgages
An FHA mortgage is a loan given by an approved lending institution, and the loan is insured by the Federal Housing Administration. The borrower pays a fee for the FHA loan insurance, but this fee can be amortized over the life of the loan. In the event of default, the FHA will pay the lender for any losses.
VA mortgages are guaranteed by the Veterans Administration. Only honorably discharged Veterans of the U.S. armed forces are eligible for these loans. The VA, like the FHA, sets the interest rates, qualification standards, and down payments required for their mortgage loans. While interest rates for VA and FHA loans are set by these agencies, rates for conventional loans are set by the lending institutions and depend upon money market supply and demand.
More Details About FHA and VA Mortgages
FHA and VA mortgages may be assumable, which means a buyer can take over the existing mortgage and make the monthly mortgage payments to the lending institution without qualifying for a new mortgage. The lender also cannot increase the interest rate or require refinancing of these loans. Most other mortgages contain due-on-sale clauses which require payment of the mortgage balance upon the sale of the property. These clauses force refinancing of the mortgage loan whenever a property is sold.
Are There Advantages to An Assumable Mortgage?
An assumable mortgage can be advantageous to the buyer because the buyer is relieved of qualifying for the mortgage, and the interest rate on the existing mortgage may be below the current market rate. In addition, the buyer can avoid paying several costs that are associated with obtaining a mortgage loan. For example, to obtain most mortgage loans, a borrower must pay an origination fee to the lender for arranging the loan.
The borrower may also pay points, which are essentially a way to increase the lender’s return on the loan in the first year while offering the borrower a slightly lower interest rate. A point is one percent of the mortgage loan amount. On a $100,000 mortgage, one point is $1,000. A borrower must also pay closing costs, which may include title insurance, attorney’s fees, recording fees, survey and appraisal fees, credit reports, and insurance and tax reserves.
In addition to avoiding payment of the origination fee and points, an individual assuming a mortgage can avoid some of the other closing costs associated with purchasing real estate. Note that the assumption of an existing mortgage may not make sense where the interest rate on the existing mortgage is above current market rates or where the existing mortgage balance is relatively small.