A conventional mortgage refers to any loan that is not insured or guaranteed by the federal government, as opposed to government insured loans such as FHA (Federal Housing Agency) and VA (Veteran’s Administration). Conventional mortgage loans can be either fixed mortgages or adjustable-rate mortgages, including hybrid ARMs. Conventional mortgages (whether conforming or not) typically have a slightly higher down payment than government loans. However, conventional mortgages normally provide more flexibility and lower interest rates for buyers with good credit and the ability to afford a slightly higher down payment.
Fixed Rate Mortgages
A fixed rate mortgage, the most common type of mortgage today, is a mortgage that has a fixed interest rate for the entire term of the loan. The benefit of a fixed-rate mortgage is that the interest rate and monthly loan payments will stay the same, eliminating any concerns about varying loan rates and payment amounts that fluctuate with interest rate movements, especially when interest rates are expected to rise. Fixed rate mortgages most commonly come with 15 and 30-year terms, although other options such as 10, 20, and 25-year terms are also available and can make sense depending on your short and long-term housing goals.
Adjustable Rate Mortgages (ARMs)
An adjustable rate mortgage is a mortgage that has an interest rate that can change periodically after the initial fixed rate period, typically each year, which in turn can also affect the monthly payment. The initial interest rate is fixed for a set period of time (typically 3, 5, 7, or 10 years) before it is susceptible to annual increases or decreases based on market fluctuations. The benefit of an adjustable rate mortgage is when interest rates are expected to fall, a homeowner could potentially lower their monthly payments with the lowered interest rates.