Conventional Loans
A conventional loan is a mortgage that is not insured or guaranteed by the federal government. A conventional loan adheres to the guidelines and maximum loan amount set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are government sponsored-enterprises which were created by the federal government to buy and sell conventional mortgages.
A conventional loan can have a fixed rate or adjustable rate. The most common type of conventional loan is a 30-year fixed rate mortgage, which means the interest rate is fixed and will not change for the entire 30 year term of the loan.
A conventional loan usually requires at least a 5% down payment, but you may qualify for 3% down payment if the home will be your primary residence and you meet certain qualification guidelines. If your down payment is less than 20% you will be required to obtain private mortgage insurance (PMI).
Fixed Rate
A mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements.
Adjustable Rate
So what is an adjustable-rate mortgage?
A variable-rate mortgage or adjustable-rate mortgage (ARM) is a mortgage loan with the interest rate on the note periodically adjusted based on an index. The interest rate can increase or decrease based on the loans introductory period, rate caps, and index interest rate. Typically, the ARM is fixed for a period of time and after the fixed period of time will adjusts yearly or monthly. For example, when you see a 5/1 ARM, this means that the interest rate is fixed for the first 5 years and then can adjust up or down based on the loan details every 12 months.
ARMS usually have an initial lower interest rate compared to a fixed rate mortgage which makes them more attractive in a high interest rate environment. The borrower benefits if the interest rate falls but loses if the interest rate increases.