Getting ready to apply for a mortgage? You certainly have no shortage of places to get a home loan but you also have no shortage of loan types from which to choose. Here’s a starter list for you—an adjustable rate mortgage, or ARM. A hybrid. A 3/1, 5/1, 7/1 and 10/1. You can choose a fixed rate loan. A VA loan. FHA. USDA. A conventional mortgage underwritten to guidelines set forth by mortgage giants Fannie Mae and Freddie Mac. Confused yet?
It can be confusing but the most popular loan choice for borrowers today and over the years is a plain-vanilla conventional fixed rate mortgage. What are the benefits of a conventional fixed rate loan?
These loans are underwritten and approved by universal guidelines established by Fannie Mae and Freddie Mac and there are more conventional loans issued then any other type of mortgage. Every mortgage lender that offers residential financing will have a fixed rate conventional mortgage. More choices mean more competition which then means better rates and competitive closing costs. It’s easy to see that more lenders offering the same product means they’ll fight to get your loan. There are lenders who specialize in say one or two mortgage types, say a lender that specializes in FHA or VA loans, but those same lenders will also have in their repertoire the conventional fixed rate loan.
Besides low rates, the major advantage is the fixed rate loan is just that—it’s fixed. It will never change throughout the life of the loan and can only change if the borrowers refinance or otherwise modify the existing mortgage. You will not only know what the mortgage payment will be this month but you’ll also know what the mortgage payment will be in the 143rd month. There are no surprises. So does that mean other loan types such as a hybrid 5/1 ARM are never a good choice? Not really.
ARMs and hybrid loans do have slightly lower starting rates compared to their fixed rate cousins but they also have an inherent instability when the loan adjusts at some point in the future. The borrowers wont’ know what their payment will be in say the 37th month of a 3/1 hybrid ARM. The borrowers will know the maximum it can be at each adjustment period but the loan program can and will at some point adjust. Those that select a hybrid loan will typically plan on owning the property for just a few years, usually before the loan makes its first or second adjustment. Otherwise, the fixed rate loan is the preferred choice.
Fixed rate loans also come in various terms ranging from 10 to 30 years, often I five year increments. This means borrowers can select a term based upon how long the loan will last until it is finally paid off. A shorter term loan will have higher monthly payments but borrowers save much more on long term interest with a shorter loan. Fixed rate loans might be a little boring, but they’re meant to be. The stability, the selection and the competition for your borrowing business are all benefits of choosing a conventional fixed rate mortgage.