Conventional home loans are not insured or guaranteed by the federal government. In general, conventional loans are protected by Fannie Mae & Freddie Mac which are stockholder-owned corporations and are not part of the federal government. 3%-5% minimum down payment required.
Fixed Rate Adjustable Rate Mortgages Combination (Hybrid) Loan
Balloon Mortgage Jumbo Loans Reverse Mortgages
Fixed Rate Mortgages
The fixed rate mortgage is the most popular home financing type. Having an interest rate that never changes, it gives you stable and predictable monthly payments throughout the life of the loan. Fixed rate mortgages can be good for first time buyers and anyone on a budget who needs a set monthly repayment. If you refinance with a fixed rate mortgage you have the security of knowing the exact amount you will repay each month without changing your monthly amount owed. Fixed rate mortgage loans are important if you plan on staying in the home for a period longer than 5 to 7 years.
The traditional fixed rate mortgages have monthly principal and interest payments that never change during the life of the fixed rate mortgage. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can usually be paid off at any time without penalty. This type of mortgage is structured, or “amortized” so that it will be completely paid off by the end of the loan term.
Adjustable Rate Mortgages
Adjustable rate loan programs (ARMs) are mostly used for home buyers that only plan to own their home for a short period of time, or plan on paying off their home in the near future, perhaps from the sale of another property. ARMs give you more affordability and flexibility in your monthly payment as they typically have an interest rate that is 1/2 point to 1 1/2 points lower than a 30 year fixed rate loan, depending on the fixed period of the ARM. After the initial fixed period (usually 3, 5, 7, or 10 years) the interest rate can adjust, up or down, depending on the index of the loan, the margin, and the “caps”. The index is a published rate relating to either the U.S. Treasury Bond, the London Interbank Offering Rate (LIBOR), or the Cost of Funds Index (COFI). The index is added to the margin (usually anywhere from 1.5 to 3.0) to get the new, adjusted interest rate. The “caps” refer to how much the interest rates can go up or down during the first change, how much it can go up or down each change period after the first change, and the maximum that it can go up or down over the life of the loan
Hybrid – Combination Rate Mortgages
Hybrid loans combine features of both adjustable and fixed-rate mortgages. It may start with a fixed-rate for a certain length of time, and then later convert to an adjustable-rate mortgage. You need to ask how much the rate may increase after the conversion, as some hybrid loans do not have interest rate caps for the first adjustment period.
Other hybrid loans may start with a fixed interest rate for several years, and then change to another (usually higher) fixed interest rate for the remainder of loan. A lower introductory interest rate for a hybrid loan vs. a traditional fixed rate mortgage makes this type of loan appealing to the homeowner who wants the stability of a fixed-rate, but only plans to stay in their property for a short time.
This mortgage has a payment schedule similar to a 30-yr fixed rate loan, but the term of the balloon loan is shorter, typically 5 to 15 years. At the end of the loan term, 5-15 yrs, the outstanding balance must be paid in one lump sum, either out of pocket or by refinancing the home. There are pros and cons when comparing them to Fixed and Adjustable loans.
Jumbo Loans go over the maximum loan amounts established by Fannie Mae and Freddie Mac conventional loan limits (thus called non-conforming loans). The rates on jumbo loans are typically a little higher than conforming loans. Jumbo Loans are most commonly used to buy more expensive homes and high-end custom construction homes.