Conforming Mortgages

Conventional / Conforming loans are for 1-4 unit/condos, primary residences and second homes. These loans meet specific bank lending criteria, including the loan amounts, limits set on loans by Fannie Mae and Freddie Mac. Those limits are:

1-unit: $25,000- $417,000
2-unit: $25,000- $533,850
3-unit: $25,000- $645,300
4-unit: $25,000- $801,950

There are two types of conventional / conforming loans: Fixed rate mortgages and adjustable rate mortgages. We’ll explain each below.

Fixed Rate Mortgage

The interest rate on a fixed-rate mortgage never changes throughout the life of the loan. You pay the same principal and interest payment each month until the loan is fully amortized and paid off.

The most common fixed-rate mortgage is the 30-year fixed rate loan. Fixed rates also come with terms of 10, 15, 20 and 25 years. The advantage of a fixed rate mortgage is that it provides permanent long-term rate security. Typically, it’s the best program for you if you don’t plan to move or refinance your mortgage for at least 7-10 years. Otherwise, an adjustable rate mortgage (ARM) may prove to be more advantageous for you.

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage (ARM) offers you an interest rate and payment that remains the same for a fixed period of time, usually the first 1, 3, 5, 7, or 10 years of your loan. After this initial period, your interest rate and payment adjust at fixed intervals throughout the remaining term of the loan. Typically, these adjustments occur every 1, 3, 6, or 12 months, with 12 months being most common.

Most ARM products adjust by adding a margin (commonly 2.75%) to an index yield (for example, the 1-year treasury securities index) to determine your new interest rate and payment. Most ARMs also provide some “rate shock” protection, by capping the potential rise in interest rate at each adjustment interval (usually capped at 2%), and during the life of the loan (usually capped at 6%).

Since the interest rates on ARMs are typically lower than fixed-rate loans during the beginning years of the loan, ARMs can greatly benefit you if you plan on being in your home for less than 7-10 years. They are also advantageous if you think you may refinance within 7-10 years or so, or expect that your income will be increasing over the next few years.

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