Conventional loans are the most common type of mortgage. Unlike FHA and VA , these mortgage loans aren't insured by any government program.
Fixed Rate Mortgage
- A Fixed-Rate Mortgage has a static interest rate for the entire life of the loan, and offers a straightforward, consistent monthly payment.
- When you have a fixed rate mortgage, your interest rate is defined when your mortgage is originated and will not change over the term of the loan. The consistent monthly payment and rate helps you budget based on this fixed cost.
A Fixed-Rate Mortgage may be a good choice if you:
- Think interest rates could rise in the next few years and want to take advantage of current rates. Today, rates are near historic lows.
- Plan to stay in your home for many years.
- Feel more secure knowing that you have a fixed monthly interest payment instead of a payment that changes periodically. Changing rates are the norm with an Adjustable-Rate Mortgage. See below.
- Commonly referred to as an "ARM" - this mortgage loan has an interest rate that changes, or 'adjusts' - usually based on a financial index.
- As interest rates rise and fall, your monthly payments adjust accordingly. Lenders may offer lower initial interest rates for ARMs. However it's important to know, and to weigh the risk, that future increases in interest rates could lead to higher monthly payments.
- The initial rate and payment on an ARM remains the same for a limited period of time at the beginning of the loan. Most ARMs are 30 year loans with rates and payments fixed for the first 3, 5, 7 or 10 years. After that, they usually adjust every year.
- Interest rates on an ARM are made up of the index and margin. The index is a measure of interest rates. The margin is an additional amount that the lender adds on top of the interest rate. The good news is that payments on an ARM are limited by the caps that set how high or low your rate can go. Not all ARMs will adjust downward so be sure to read the fine print.