There are two kinds of conventional loans, including a “fixed rate mortgage” and an “adjustable rate mortgage.”
Fixed Rate Mortgage
The fixed rate option is best if you are planning to own your home for at least 7 years.
The total amount of your principal plus interest will not increase over the lifespan of your loan.
- Rate protection - your rate stays the same even if mortgage rates go up
- Payment stability - you will always know what your monthly payment will be
- Budgeting ease - budgeting your mortgage expense is easier because your payment does not fluctuate
- Earlier pay-off - even with a fixed rate, you can make extra payments to pay off your loan sooner
Adjustable Rate Mortgage
An adjustable rate mortgage is a loan with an interest rate that may fluctuate over time but only after an initial "fixed" period (typically 5 or 7 years).
- Lower rates - during the fixed period, the interest rate is often lower than for other loans
- Lower payments - when your interest rate is low, your payments will be lower, too
- Lower cost - if you are planning to own your home for only 5 to 7 years, this option keeps your payment lower for the initial term of the loan
- Rate caps - control how much your rate can increase