There are some things you should know about a conventional mortgage vs. high ratio mortgages if you’re getting ready to buy a home.
First of all, you should always do all of your research into any mortgage that you’re going to get. If you think a conventional mortgage is your only option, then you haven’t done enough research. Even if you determine that a high ratio mortgage doesn’t make sense for you, it’s best to make that as an informed decision.
Basics of a Conventional Mortgage
A conventional mortgage is the type of home mortgage that you are probably already familiar with. In other words, it’s a loan to buy a home. However, for a conventional mortgage, you must also put down a down payment.
As a home buyer, you need to come up with at least 20% of the purchase price for that down payment. For example, if you plan to buy a home for $500,000, then you need to come up with 20% of that, which is $100,000. Then you would get the mortgage for the remaining 80% or $400,000.
What is a High Ratio Mortgage?
What do you do if you are ready to buy a home but you can’t come up with 20% for a down payment? One option is to get a high ratio mortgage. This is a mortgage that is for more than 80% of the value of the home. In other words, you might still pay a down payment, but it’s for less than 20% of the purchase price of the home. In the above example, if your down payment is less than $100,000 then you might be looking into a high ratio mortgage.
Here are a few other things to know about a high ratio mortgage:
- The home purchase is limited to $1,000,000 or less.
- Amortization is capped at 25 years.
- High ratio mortgages are a Canadian term; FHA loans in the USA are similar.
The Loan-to-Value Ratio
If you’re comparing a conventional mortgage vs. high ratio mortgage, then one of the terms you’re likely to see is the “loan-to-value ratio.” This is also called the LTV. The conventional mortgage is for an 80/20 LTV. As previously described, this means that you can borrow no more than 80% of the purchase price. The 20% down payment is up to you to come up with. A high ratio mortgage might have a different LTV, such as 90/10.
Conventional Mortgage vs. High Ratio Mortgage
If you can afford a conventional mortgage, then it’s typically the way to go. However, that doesn’t mean that it’s a negative thing to get a high ratio mortgage. You can choose either an adjustable rate or variable rate loan for either type of mortgage. If you can get a good interest rate, then you should be able to keep your monthly mortgage payments manageable with either type of loan.
Lenders require people with a high ratio mortgage to get mortgage insurance. Therefore, that’s one added cost to consider when you compare a conventional mortgage vs. high ratio. Furthermore, your insurance premium will be higher if you need more money. In other words, if you can make a down payment of 15% instead of 10%, then you can reduce your costs.
Additionally, high ratio mortgage loans are considered higher risk; therefore the interest rate that you can get might be higher than that of a conventional mortgage. As a result, if you choose a high ratio mortgage, then you should aim to lock in a low fixed interest rate on that loan.
Do you have any specific questions about conventional mortgage vs. high ratio that we haven’t answered here? Share in the comments.
Read More:
- First-Time Homebuyers: Is An FHA Mortgage a Smart Option?
- Tips to Save Money on Your Mortgage
- Are Mortgage Brokers Better Than Banks?
Kathryn Vercillo is a professional writer with more than a decade of experience writing about healthy living and personal finance. She lives in San Francisco, where she has learned to maximize frugal living tips in order to thrive as a freelancer in one of the nation’s most expensive cities. When she’s not writing, she’s exploring the city on foot with her rescue dog. Learn more about her at www.kathrynvercillo.com.
Kathryn also writes about saving money with coupons over at GroceryCouponGuide.com