Conventional loans are the more popular and traditional options for borrowers.
According to the U.S. Census Bureau, nearly 3/4's of all new home sales in 2018 were purchased with conventional loans. These loans can sometimes be called “conforming” loans because they “conform” to the Fannie Mae and Freddie Mac guidelines.
Buyers are typically more interested in conventional loans because, A. they are the most ubiquitous, and B. they typically have the best loan terms: lowest interest rates, lower monthly payments, etc.
Why doesn’t everyone just go for the conventional loan? Not everyone can qualify.
Conventional loan programs are ideal if you:
- Have good to excellent credit
- Enough cash for down payment
Typically between 3.5% - 20%
- Plan to purchase a primary, secondary or investment property.
There are two conventional loan programs people use –one more commonly than the other.
For a fixed-rate, the borrower has a set interest rate and consistent monthly payments. This is a good choice if you plan to be in that home for a long time. The FRM is available in terms ranging from 10 – 30 years, offers a waived PMI with a 20% down payment, and can be obtained with as little as 3% down.
Adjustable Rate Mortgage
The slightly less common option is the Adjustable Rate Mortgage. For this program, you choose from a variety of options, the most popular being the 5/1 ARM, 7/1 ARM, and the 10/1 ARM. The first number signifies a set period that the loan is repaid at a fixed rate. After that time expires, the interest rate will adjust according to the second number.
For example, a 10/1 ARM will maintain a fixed interest rate for 10 years, and then adjust
every 1 year after until the loan is repaid.
This is considered a riskier option because you can’t be sure the market will shift in
your favor after your fixed period is up, but there are plenty of advantages to the ARM:
- a lower fixed interest rate than the fixed-rate mortgage offers
- lower initial monthly payments
- limits on how much your payments can increase
- down payments exceeding 20% to negate the PMI
- ability to start with as little as 3% down
That’s a lot to consider. At the end of the day, what type of loan you seek depends on your financial situation and goals. This can be best determined by speaking with a professional.
Get in contact with one of our licensed loan officers today for a free rate quote in minutes!