When lenders use the term “conventional mortgage,” they usually mean a loan that conforms to guidelines created by Fannie Mae or Freddie Mac, the two government sponsored enterprises that provide liquidity in the mortgage market.
A conventional loan is any mortgage that is not guaranteed by the government, such as FHA, VA, or USDA. The benefits of conventional mortgages include:
- Flexible terms:
- fixed or adjustable rate mortgages available
- 10, 15, 20, 25 or 30 year loans available
- Flexible mortgage insurance options: lender paid, up-front, monthly or a combination
- Flexible occupancy – the ability to finance vacation homes or rental properties
A Fixed Rate Mortgage ensures that your payments will stay the same over the life of the loan. This has the obvious advantage of enabling you to calculate your monthly expenses without worrying about fluctuations in your mortgage payments over time.
Fixed Rate Mortgages are typically available with terms of 10, 15, 20, 25 or 30 years. To calculate mortgage payments (amortization), the loan amount is divided by the number of months in the term, and tax and insurance are added. Payments for 15 and 20 year terms, will be higher than a 30 year loan because they are amortized over a shorter period of time. The shorter this period, the higher the actual payment, but the greater the savings in the amount of interest paid over the life of the loan. For example, a 15 year fixed term will result in paying off your mortgage in 1/2 the time, with huge savings to you in the interest you will pay. This could be an important consideration if you are nearing retirement or have other large expenses to cover, such as your child’s education.
With an Adjustable Rate Mortgage (ARM), your interest rate is fixed for a given period of time, depending on the term you have chosen, typically 1, 3, 5 or 7 years. ARM loan rates are typically lower than the longer fixed rate terms described in this section. Your interest rate will increase each year after completion of the fixed period. These predetermined adjustments define the amount of interest rate increase you may incur during each adjustment period, and also the maximum interest rate you could be charged over the life of the loan.