Conventional Loans

Conventional loans are any mortgage that is not guaranteed or insured by the federal government. Although a conventional loan is not insured or guaranteed by the government, it still follows the guidelines of government sponsored enterprises, Fannie Mae and Freddie Mac.

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What Is A Conventional Loan?

Conventional loans may be “conforming” and “non-conforming”. Conforming loans follow the guidelines set by Fannie Mae and Freddie Mac. These guidelines put the maximum purchase amount for a first mortgage at $715,000 (may be higher, subject to county loan limits) for a single-family dwelling. If the purchase is for a property that is either a two-family, three-family, or four-family dwelling, larger values apply before the loan is no longer considered a conventional loan.

Fixed Rate

With a fixed rate loan, your rate is fixed and your payment remains the same throughout the length of your loan (i.e. 30-years). A fixed rate loan is an excellent choice if you plan to live in the home for many more years. The traditional fixed rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan.

Fixed rate mortgages are available in terms ranging from 10 to 30 years and is structured, or amortized, so that it will be completely paid off by the end of the loan term. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Even though you have a fixed rate mortgage, your monthly payment may vary if you have an impound or escrow account. In addition to the monthly loan payment, some lenders collect additional money each month for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an escrow account by the lender who uses it to pay the borrowers' property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.

Adjustable Rate

With an adjustable rate loan, your rate will adjust and your payments will fluctuate based on changes in the market. However, the rate and payment remains unchanged during the introductory period which could be 3, 5 or 7 years. The initial rate for an adjustable rate mortgage is usually lower than that of a fixed rate loan. After the introductory period expires, the interest rate is subject to adjust at predetermined periods, usually every six months. The rate adjustments are based on market interest rates and the adjustment caps limit how much your interest can adjust in a specified period of time. An adjustable rate mortgage is a great choice if you don’t plan to own the home for a long period of time.

Interest Only

With an interest only loan, you only pay the interest on the principal balance of the loan for a set period of time (i.e. 5-years or 10-years) with the principal balance remaining unchanged for that period of time. Once the interest only period is up, the principal balance of the loan is then amortized for the remaining term of the loan (i.e. 20-years or 25-years). An interest only loan is a good choice if you are looking for more flexibility as your initial payments will be less for the first 5 or 10 years.