Final answer:
A conventional loan is a standard form of home financing that usually requires a 20% down payment to secure a mortgage. Options exist for lower down payments, but they typically require mortgage insurance, increasing the loan's lifetime cost. Interest rates and inflation also impact whether it is more advantageous to be a borrower or a lender in a given year.
Step-by-step explanation:
A conventional loan is a popular financing option for purchasing a home, typically requiring a down payment of 20% of the property's sale price. This down payment serves as a risk mitigation strategy for lenders, ensuring that borrowers have substantial equity in the property, which in turn reduces the lender's exposure in case of default. If a home is bought for $100,000, a 20% down payment would amount to $20,000, with the borrower taking a loan for the remaining $80,000.
However, not all borrowers can afford the 20% down payment, leading to alternatives such as loans with down payments as low as 0-3.5%. These options often necessitate purchasing mortgage insurance, an additional cost that protects the lender in the event of default. This increases the overall mortgage amount paid over time.
Another aspect to consider is the context of interest rates and inflation. Borrowers benefit when the inflation rate is higher than the interest rate, as this effectively reduces the real cost of borrowing over time. Conversely, lenders benefit when the interest rate exceeds the rate of inflation, as it increases the real return on the loan. In light of these factors, individuals need to be cautious, especially with high-risk loans such as adjustable-rate mortgages (ARMs) or other types of financing that have led to financial instability and defaults in the past.