CONVENTIONAL MORTGAGES & COMMON MORTGAGE TYPES
CONVENTIONAL MORTGAGES
Down payment and LTV 
/ PMI
A conventional mortgage loan is a permanent long-term loan that is not FHA-insured or VA-guaranteed. Market rates usually determine the interest rate on the loan.
Down payment and LTV
Because of the lack of insurance or guarantee by a government agency, the risk to a lender is greater for a conventional loan than for a non-conventional loan. This risk is usually reflected in higher interest rates and stricter requirements for the down payment and the borrower’s income qualification.
The loan-to-value ratio (LTV) is often lower on conventional loans than on those with government backing, which means the down payment is higher. At the same time, conventional loans allow greater flexibility in fees, rates, and terms than do insured and guaranteed loans.
PMI
Because of the riskiness of conventional loans that have a down payment of less than 20% of the property value, lenders often require the borrower to obtain private mortgage insurance, or PMI. Mortgage insurance protects the lender against loss of a portion of the loan in case of borrower default. PMI can be paid as a lump sum annually or on a monthly basis. When the borrower has achieved 20 percent equity in the property (the loan balance falls to 80% of the home’s original value), the lender or servicer must terminate the PMI requirement on the borrower’s written request.
COMMON MORTGAGE TYPES
Amortized Adjustable and fixed rate
Variations in the structure of interest rate, term, payments, and principal payback produce a number of commonly recognized mortgage loan types. Among these are the following.
Amortized
Amortizing loan. Amortization provides for gradual repayment of principal and payment of interest over the term of the loan. The borrower’s periodic payments to the lender include a portion for interest and a portion for principal. In a fully amortizing mortgage, the principal balance is zero at the end of the term. In a partially amortizing loan, the payments are not sufficient to retire the debt. At the end of the loan term, there is still a principal balance to be paid off.
Negatively amortized loan. Negative amortization causes the loan balance to increase over the term. This occurs if the borrower’s periodic payment is insufficient to cover the interest owed for the period. The lender adds the amount of unpaid interest to the borrower’s loan balance. Temporary negative amortization occurs on graduated payment loans, and may occur on an adjustable rate mortgage.
Adjustable and fixed rate
Loans may have fixed or variable rates of interest over the loan term. Adjustable rate mortgages (ARMs) allow the lender to change the interest rate at specified intervals and by a specified amount. Federal regulations place limits on incremental interest rate increases and on the total amount by which the rate may be increased over the loan term.
