Fixed Rate Mortgages

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “biweekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Loan Qualification

Conventional and FHA loans use different standards for borrower approval. FHA loans are easier to qualify for, but Conventional Loans offer lower rates. As of 2018 the minimum credit score you need to qualify for an FHA loan with a 3.5% down payment is 580. . A score of 620 or better is generally recommended to get approved for a conventional mortgage, but individual banks can require an even higher score. With an FHA loan, you may be able to get approved with a higher debt-to-income (DTI) ratio, but conventional mortgages typically cap the acceptable DTI ratio at 43%.

Down Payment Requirements

FHA loans have long been touted as the go-to option for homebuyers who don’t have a significant amount of cash for a down payment. It’s possible to buy a home with as little as 3.5% of the purchase price down through the FHA loan program. Traditionally, a 20% down payment has been the standard for conventional loans, but it’s now possible to get a mortgage through Fannie Mae or Freddie Mac with a down payment of 3%. That could make a conventional loan slightly more attractive for qualified buyers.

Private Mortgage Insurance

Private Mortgage Insurance is applied to your loan payment if you put less than 20% down on a home purchase.  Because Conventional Loans are not backed by any Agency, the lender is saying that anything less than 20% down is considered a risk.

PMI is an insurance policy for the lender that allows them to recoup any financial losses if you default on your mortgage. FHA loans also carry private mortgage insurance, but they’re called mortgage insurance premiums (MIP). 

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