These are conventional loans that follow the terms and conditions established by the guidelines of Fannie Mae and Freddie Mac. Conforming loans are equal to or less than the dollar amount established by the conforming loan limit set by Fannie Mae and Freddie Mac’s and meets their funding criteria.
Types of Conforming Loans
The interest rate and the principal payments remain fixed throughout the loan. Keep in mind your monthly escrow account payment could vary from year-to-year as taxes and insurance rates change.
30 Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for adjustable rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.
15 Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great
Adjustable Rate Mortgages (ARM)
The interest rate on the loan fluctuates over the period of the loan. Periodic adjustments to the interest rate are made based on changes to a defined index. The loan’s interest rate is determined by adding a fixed number of points to the defined index. When it comes to ARMs there’s a basic rule to remember…the longer you ask the lender to charge you a specific rate, the more expensive the loan.
Conforming 5/1 ARM
A 5/1 ARM product is an adjustable rate mortgage that has a fixed interest rate for the first 5 years, then adjusts annually. The biggest benefit of a 5/1 ARM loan is that the interest rate is lower than just about every other type of mortgage loan available.
A 5/1 ARM may be a good choice for you if you think it is possible that you may move or refinance in the next five years. A 5/1 ARM is also very popular because the extremely low rate allows borrowers to maximize their cash flow to enjoy lower monthly payments and free up extra cash monthly to pay toward eliminating other monthly debts (i.e. credit cards, car payments, student loans, etc.).
A 5/1 ARM offers very substantial benefits with the low monthly payments associated with this type of loan. A borrower, however, must realize there is some risk in knowing