Conventional Loans – Fixed Rate
Conventional loans are the original form of financing a home purchase. They can be financed with 30, 20, or 10-year mortgages. Generally, the shorter the term the lower the interest rate since investors accept the risk of the loan for less time. This often means lower interest rates for shorter term mortgages. Since the loan is paid off quicker the monthly payment is normally higher. You pay less interest over the life of the loan with shorter term mortgages.
Conventional loans are available with as little as 3% down. The minimum credit score is normally higher than on a government loan and more stringent underwriting restrictions. An advantage of conventional loans is there is no mortgage insurance with a loan to value of less than 80%.
Conventional Loans – Adjustable Rate
Adjustable rate mortgages are known as ARM’s. The interest rate and payments will change periodically based on rising or falling interest rates. ARM’s generally have a lower interest rate than fixed loans at the beginning. That allows for lower payments and possible qualification for a higher priced house. This is often helpful to those who are beginning careers with the prospect of nice pay increases.
There are various forms of ARM’s. For instance, a 5/1 ARM has a fixed rate for five years with an annual adjustment after that. There are cap’s on ARM’s to let the consumer know the highest the interest rate could increase or decrease. ARM’s are most attractive to those buyers who do not plan to live in the house long term. They are viewed as riskier loans since the interest rate can increase beyond the fixed period.