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Conventional mortgages are the most common type of loan, accounting for 60% of all mortgage applications. As private-sector loans that are not government-backed but follow guidelines set by Fannie Mae and Freddie Mac, there is no guarantee to the lender if a borrower defaults, and thus the requirements are known to be stricter.
Generally, a conventional mortgage is ideal for borrowers with good credit that can provide a larger down payment. Conventional loans are more affordable in the long run and can be a smart investment for your future.
There are two types of conventional mortgages: fixed rate and adjustable rate.
Fixed Rate MortgagesÂ
Fixed-rate mortgages maintain a fixed interest rate for the life of the loan. This mortgage option offers predictable payments and is ideal for buyers that intend to stay in their home for a long time.
With a fixed rate, borrowers can choose between 15-year, 20-year, and 30-year mortgages. Note that the shorter the loan period, the lower the interest rate but, the higher the monthly payments will be.
Adjustable Rate Mortgages
Also known as a variable rate or tracker mortgage, an adjustable-rate mortgage is a mortgage with a convertible interest rate. This mortgage option will allow a buyer to start out with a lower monthly payment. However, after an initial fixed period of 3 to 10 years, that rate can be adjusted yearly based on the performance of an index. Note that rate caps will prevent the interest rate from going up or down past a certain point.
An adjustable-rate mortgage is a good option if you need a lower monthly payment to get started and you don’t mind the unpredictability of a fluctuating interest rate in the future.
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