Conventional – Fixed


The Conventional fixed rate mortgage loans, also known as conforming mortgages, are the most widely used and popular mortgage type in the market place. These mortgages are currently backed up by Fannie Mae and Freddie Mac and carry a national maximum loan limit of $453,100.

Guidelines and Parameters

A fixed-rate mortgage offers a predictable, straightforward monthly payment. With fixed-rate mortgages, your interest rate (and your total monthly payment of interest and principal) will remain the same for the entire term of the loan. This predictability allows homeowners to budget for the future more effectively.

30-year fixed rate

This is the most common mortgage that homebuyers compare rates to. The rate is good for 360 months (30 years) and is amortized over that time period to payoff.

20-year fixed rate

Typically there is not much difference in rate between the 30-year fixed and the 20-year fixed rate mortgage. This rate is based on 240 months and as the term decreases to pay back, the payment owed increases.

15-year fixed rate

This mortgage will be due in full in 180 months. It will have an even higher payment than the 20-year term.

10-year fixed rate

The 10-year fixed rate is the shortest term available right now. It is due in 120 months and accompanies the largest payment.


Who Is It Right For?

Fixed Rate Mortgages are ideal for homebuyers who:

  • Are buying their first home
  • Are buying additional property
  • Think interest rates could rise in the next few years and want to keep the current rate
  • Plan to stay in their home for many years

Features

All fixed rate loans have one feature in common: the interest rate will not change for the duration of the mortgage.  Because of this feature that comes with less risk for the consumer, these rates always come with a premium built into the interest rate.  The shorter the duration of the fixed rate loan, the lower the interest rate.

All fixed rate loans contain the following features:

Once an interest rate is locked in and the loan closes, the interest rate will never change.

Whether it is a 30, 20 or 15 year fixed, or any other term in between, the fixed rates follow an amortization schedule that will pay the mortgage note down on that specific schedule.

Any fixed rate loan will allow you to build equity with no uncertainty of where the interest rates will go.  You can consider any fixed rate loan “forced savings.”

Because these interest rates will not change, a fixed rate loan will always allow you to forecast when you will pay off your debt service and budget accordingly for any budget and expenses.

Fixed Rate

Pros

  • Predictability. One knows how much interest there is to pay over the term of the loan.

 

  • Monthly payment is fixed and in early years consists primarily of tax-deductible interest.

 

  • Mortgages without prepayment penalties permit you to shorten the term of the loan at will — and lower ultimate interest cost — by making periodic payments against principal.

Cons

  • This stability comes with a price, interest rates on fixed rate loans are generally higher than starting rates on ARMs.

 

  • If you choose a low down payment option you may have to pay for mortgage insurance which adds an additional monthly fee to protect the lender from risk of loss.

Adjustable Rate Mortgage

Pros

  • Lower initial rate and payment amount, this means you may be able to buy a larger home than you originally believed.

 

  • If mortgage rates fall borrowers need not refinance to take advantage of them, instead they are automatically lowered.

 

  • If borrowers choose an ARM and save money it creates a way to invest more. If a borrower saves $100 a month in an account rather than putting it towards a mortgage payment it yields a higher investment interest.

 

  • If a borrower does not plan on living in one place for long an ARM can offer an inexpensive way to purchase a home.

Cons

  • Rates and payments can increase drastically over the life of the loan. A 6 percent ARM could end up at 11 percent in just three years if rates continually increase.

 

  • The initial adjustment can come as a surprise.

Long Term

Pros

  • Predictability. Homebuyers know how much interest there is to pay over the term of the loan.

 

  • Monthly payment is fixed and in early years consists primarily of tax-deductible interest.

 

  • Mortgages without prepayment penalties permit homebuyers to shorten the term of the loan at will by making periodic payments against principal—and, ultimately, lowering interest costs.

Cons

  • This stability comes with a price; interest rates on fixed rate loans are generally higher than starting rates on ARM’s.

 

  • If you choose a low down payment option you may have to pay for mortgage insurance, which adds an additional monthly fee to protect the lender from risk of loss.

Short Term

Pros

  • Principal balance is reduced relatively rapidly compared to longer-term loans.

 

  • Permits outright home ownership in half the time with half the cost of interest of a 30-year fixed.

 

  • May have lower interest rates than a 30-year fixed and therefore offers a useful financial planning tool.

Cons

  • Higher monthly payments than those on a 30-year fixed make these loans more difficult to qualify for.

 

  • Choosing a loan with a shorter amortization period reduces the number of homes an individual can afford to buy.

 

  • Monthly payments are roughly 15%-30% higher than they would be on a comparable 30-year fixed.

Bi-weekly fixed rate

Pros

  • Biweekly payment schedule speeds up amortization, interest costs, and shortens the loan term generally to between 18 and 22 years. Homeowners make 26 biweekly payments (13 annual).

 

  • Conversion to a 30 year fixed is generally permitted.

 

  • Lowers interest expense.

Cons

  • There is generally an additional charge for this service thus making it a very costly way to shorten the life of the loan and lower the interest expense.

 

  • The same effect can generally be achieved by obtaining a 30 year fixed mortgage and simply making an additional payment or two each year or by applying an additional sum to principal repayment when homeowners make a monthly payment.

 

  • As with other rapid-payoff mortgages homeowners trade total interest-cost reductions for reduced tax benefits.

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