What are Conventional Home Loans?
Conventional loans are traditional home mortgages, not backed by any government program of insurance or guarantee. There are standard underwriting guidelines for conventional conforming loans up to $484,350. These loans are available as a fixed or variable (ARM) rate with a variety of repayment terms which can be tailored to your individual needs. Buyers will need cash reserves/savings to cover two months of payments and generally, there is not a penalty for prepayment.
The mortgage experts at Paramount Bank can help you navigate traditional mortgage solutions to fit your needs. We work with our clients to provide competitive, comprehensive lending options that align with your goals.
Fixed Rate Conventional Home Loans
Fixed Rate Mortgages provide the security of a fixed principal and interest payment for the term of the loan. The term of a fixed rate mortgage can provide the flexibility needed to meet your specific goals. Common fixed-rate mortgage terms are 10, 15, 20 or 30 years.
Mortgages that have a fixed rate come with many advantages, such as providing a homeowner a fixed, stable monthly payment every month that does not typically change. The mortgage terms usually dictate if the monthly payment is higher or lower; for instance, a 15 year mortgage will have a higher monthly payment versus a 30 year. However, lower mortgage terms also frequently mean lower interest rates and lower amounts of interest being paid over time.
It is important for buyers to understand the basics of their fixed rate mortgage in order to gain the most advantages of their loan for their situation. A skilled mortgage banker can help!
Adjustable Rate Mortgages (ARM)
An Adjustable Rate Mortgage (ARM) features a variable interest rate which may periodically adjust after a set term, generally one to ten years. For example, a 5/1 ARM will start with a competitively low interest rate for a five-year period which will be well below a standard fixed-rate loan. After five years the interest rate will reset based upon the loan’s margin and the index (e.g. LIBOR, Treasury, etc.) with which it is tied. Your interest rate may go up or down, or may stay the same depending upon the prevailing index.
ARMs can save on interest and lower your monthly payment. They are completely predictable with upper and lower end caps on how much the interest rates will increase, or decrease. These loans are especially attractive to home buyers who want extremely low monthly payments, or who plan to trade up in future years.
What Conventional Loan Program is Right for Me?
Many first-time buyers might be curious as to which loan options are better for them. While all loans carry some risk, it is important to come informed to your meeting with a mortgage banker.
If you are interested in getting a fixed rate mortgage loan, you might be looking for a dependable payment despite the mortgage having a higher interest rate. They are simpler to understand in general, and if you plan to stay in your home some time, the investment into a fixed rate mortgage may be worth it.
In contrast, an ARM can allow you to buy a larger home than a fixed rate mortgage, which can make your investment strategy different than someone who has a fixed mortgage. Additionally, if you don’t have plans to stay in your home for more than a few years, this mortgage option is useful in order to maximize the lower payments available for the brief amount of time. Buyers with a long-term strategy to transition to another home or find a different loan option when the rate of the loan changes would likely benefit from exploring an ARM.