Understanding Conventional Mortgages
Find all your questions about Mortgages answered here!
Fixed Rate Mortgages
A traditional, fixed-rate mortgage is the simplest and most popular loan for purchasing a new home or refinancing because it offers predictability and stability for your budget. With a fixed-rate mortgage loan, the interest rate stays the same for the entire term of the loan, so you’ll never have to worry about your interest rate increasing.
Fixed-rate mortgages are available in a variety of term lengths. The term length is the number of years over which you repay the loan and usually ranges from 10 years to 30 years. With a shorter term length, ten or fifteen years for example, you will pay less total interest over the life of the loan but your monthly payments will be higher when compared to a longer term length. If you choose a longer, 30-year term length, your monthly payments will be lower but the interest rate will be higher. You will ultimately pay more total interest over the life of the loan with a long-term mortgage compared to short-term.
Deciding between long-term or short-term is a commitment and can affect your finances for years to come. While there are several factors that go into deciding between a 15-year mortgage or a 30-year mortgage, the top three points to consider are:
- How long you will be making mortgage payments
- Interest rates
- Total amount paid, including interest, over the life of the loan
A 10-year or 15-year mortgage is ideal for those who have the financial flexibility to make higher monthly payments and also want to pay off their home faster. The interest rate will be lower which allows for a larger amount of principal repaid with each mortgage payment resulting in a significantly lower overall cost.
A 15-year mortgage is a great option for people who…
- can easily make the monthly mortgage payments with money left over for savings,
- want a lower interest rate,
- want to pay less interest over the life of their loan, and
- want to pay off their mortgage quickly.
A long-term, 30-year mortgage is the most popular choice because the monthly payments are lower for the same loan amount. Lower mortgage payments can free up your monthly cash flow for other financial goals, such as emergency savings, college tuition, or retirement.
A 30-year mortgage is a great option for people who…
- want lower monthly payments,
- prefer the option and flexibility to pay more than the minimum payment,
- have income that fluctuates throughout the year (such as freelancers and self-employed), and
- want to use the additional income for savings or other financial goals.
Adjustable Rate Mortgages (ARMs)
An Adjustable Rate Mortgage (ARM) can save you money on your loan and may be a great option for someone who only plans on living in their home for a few years. This type of loan provides a low, fixed rate for a brief period of time, typically three to seven years, before the interest rate resets. Interest rates, along with your monthly payments, can then fluctuate based on current market rates for the remainder of the loan term.
ARMs are available in a variety of configurations and term lengths, the most common are 5/1, 7/1 and 10/1; the first number represents the number of years the interest rate on your mortgage will remain fixed. The second number, also referred to as the adjustment period, represents how often the interest rate will change after the fixed rate period expires (in this case, it may adjust annually). During the adjustment period your rate may increase or decrease making your monthly payments higher or lower.
The biggest advantage of an ARM is that it is considerably cheaper than a fixed-rate mortgage, at least for the initial period. Choosing an ARM may save several hundred dollars a month during the time the rate is fixed, after which the rate will reset. The new rate may be higher or lower, depending on what the market rates are like at the time of the rate reset.
The primary disadvantage of an ARM is that your monthly payment may change frequently over the life of the loan. If you take on a large loan and interest rates rise, you may be stuck with a larger payment than you can afford. Some ARMs are structured so that interest rates can nearly double in just a few years.
An adjustable rate mortgage is a great option for people who…
- only plan to be in the home for a few years,
- want to pay a lower interest rate,
- expect their income to rise enough to absorb higher mortgage payments, or
- expect interest rates to fall.
*All applications are subject to credit, property and income approval. This is not a commitment to lend. Loan products are subject to change and may not be available in all cities or states. Speak to a licensed loan officer for more details about available loan products and full eligibility requirements.
Finding the right lender…
Since you might have your mortgage for up to 30 years, it’s important to make sure you’re aligning yourself with a knowledgeable, approachable lender. Especially as a first-time buyer, you will feel more at ease working with a bank you can trust.
At Nationwide Mortgage Bankers, we strive to provide our borrowers with a transparent, personalized experience. For more information on the mortgage process, or to find out more about our mortgage products, view our diverse offering of Services, and Get Started on your home loan preapproval application today.