May 11, 2022


Congrats! You've purchased a house. Now it is time to think about the mortgage you will receive and what that means for your finances.

There are many types of mortgages available that depend on how much you borrow, where you live, and whether or not you can afford the payments. It is essential to understand the differences between each one before signing any paperwork. Read each contract carefully, so there are no surprises later on. This article will help you understand what a conventional fixed-rate mortgage is, so you can decide whether it's the right option for you. 

What Is A Conventional Fixed-Rate Mortgage?

A conventional fixed-rate mortgage is a type of mortgage that does not adjust its interest rates. This type of mortgage has a few names: fixed-rate, traditional, or "plain vanilla loan."

A conventional fixed-rate mortgage has the advantage of being predictable for borrowers because they know what their monthly payments will be for the life of the loan. However, it also has the disadvantage of being less competitive than other mortgages because it offers no flexibility in terms of interest rates.

Conventional Fixed Rate Mortgage vs. Adjustable Rate Mortgages

A conventional mortgage rate is a fixed rate of interest set for the life of the loan. The rates are set by the lenders and are not adjustable.

An adjustable-rate mortgage, also known as an ARM, is a type of mortgage where the interest rate can change based on a predetermined index, such as LIBOR (an interest rate benchmark). ARMs usually start with an introductory period where the interest rate is either very low or zero percent, then it adjusts to a higher level after the period expires.

Conventional Fixed Rate Mortgage

Image credits:

How To Qualify For A Conventional Fixed Rate Mortgage

Conventional fixed-rate mortgages are one of the most popular types of mortgages. Since there is a fixed interest rate for the entire term of the mortgage, it is easier to budget for. By knowing precisely what your monthly payments are, you know what's coming and how much money you need to fulfill your mortgage payment for the month. 

However, the qualifying process for a conventional fixed-rate mortgage is quite different from an adjustable-rate mortgage. While it depends on your state, you need to meet specific qualifications to get this type of loan; it mostly comes down to having an average or above-average credit score.

How To Qualify For A Conventional Fixed Rate Mortgage

Image credits:

Types Of Conventional Fixed-Rate Mortgages

There are different types of conventional fixed rate mortgages. These include the following types.

Fixed-Rate Mortgages

This type of mortgage is the most popular type of loan for people who want to buy a home as the interest rate stays the same.

Adjustable-Rate Mortgages

This type of mortgage has an interest rate that changes over time according to the market conditions.

Interest Only Mortgages

This type of mortgage requires you to pay only the interest on your loan for a set period, usually five years.

Jumbo Mortgages

A jumbo loan is typically considered any loan where the amount borrowed exceeds $417,000 in most parts of the United States. Interest rates for jumbo loans are usually very high.

Calculating Your Monthly Payment For A Conventional Fixed Rate Mortgage

While mortgages are a complicated subject, calculating or estimating how much you need to pay for conventional fixed-rate mortgages is an easy number to calculate. The monthly payment for a conventional fixed-rate mortgage is calculated by taking the total cost of the loan and dividing it by the number of months in the term.

For example, if you want to purchase a $200,000 house and your down payment is $40,000, then your monthly payment will be:

$160,000 / 360 months* = $444.00 per month. Simple!

*30 year amortization period

Monthly Payment For A Conventional Fixed Rate Mortgage

Image credits:

How To Reduce Your Monthly Payment On Mortgages

Obtaining a mortgage is a long-term investment that can take years to pay off. There are options to reduce your monthly payment if you are under stress, including refinancing. In simple terms, refinancing is the process of paying off an existing loan but replacing it with another one that is usually under a different term along with a new interest rate. This may potentially help you pay off your home sooner, depending on your specific situation. Talk to your bank advisor or a real estate agent to see if this is the right option for you.

Benefits Of Conventional Loans

Conventional loans are the most common type of mortgage. These loans are often called "conventional" because they embody standards that have been used throughout the industry for decades. A government-sponsored agency typically backs them.

A conventional loan is a mortgage product with a fixed rate and fixed term. The interest rate is locked, so it will not fluctuate over time. In addition, the borrower can make extra payments over time which will lower their overall monthly costs and mortgage balance.

Benefits Of Conventional Loans

Image credits:

Who Will It Benefit? Fixed vs. Adjustable Rate Mortgages

Fixed-rate mortgages are generally a better option for people who expect to stay in their mortgaged home long-term. On the other hand, adjustable-rate mortgages may be a better option for those buying a short-term investment property or a home in which they know they won't reside for too long.

The Difference Between A Conventional Mortgage And An FHA Home Loan

An FHA home loan is a mortgage that has been insured by the Federal Housing Administration. A conventional home loan is not backed by the government but rather by a bank or another private institution. The interest rates for those are typically higher than those of an FHA loan, but the down payment requirement is lower. If this seems like a good option for you, I recommend researching and writing a list of pros and cons for each available mortgage option.

What Is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is a form of insurance that protects the lender in default on the mortgage. It is required for conventional mortgages that are not "full-documentation" loans.

The borrower pays an additional monthly fee to the lender to cover the cost of PMI. The monthly fee is typically around $30 or $35 per month, and it's often added to your monthly payment.

How PMI Is Calculated And Why You Might Need It

The PMI is based on the ratio of the loan amount to the appraised value. This means that if you are paying $150,000 for a $200,000 house, then your PMI will be 50%.

PMI is required when you have less than a 20% down payment. The insurance protects the lender in case you can’t make your monthly payments and they need to foreclose. It also protects them in case there is a drop in housing prices.

Conclusion: Is A Conventional Fixed Rate Loan The Best Option For You?

We understand that choosing the right type of mortgage is not an easy decision. However, a conventional fixed-rate loan is the best option for many people. Since this type of loan has a fixed interest rate, you will have peace of mind knowing exactly how much interest you are paying on your payments each month. This also means there will be no surprises, unlike an adjustable-rate mortgage, and your interest rate won't change over time. This will help provide stability to both sides - the borrower and the lender. 

With the booming and ever-changing real estate market, a conventional fixed-rate loan will protect against the possibility of rising interest rates. However, similar to most things in life, everything has both advantages and disadvantages. In the case of the latter,  if you are looking for flexibility, this might not be the right mortgage type for you. 

Choosing a type of mortgage is not a simple decision to make. It will impact how much money you spend (or save) over the months and years. Make this decision wisely, and ensure you have discussed your options with professionals. Good luck!

About the Author

As a native Washingtonian, Carlos Reyes’ journey in the real estate industry began more than 15 years ago when he started an online real estate company. Since then, he’s helped more than 700 individuals and families as a real estate broker achieve their real estate goals across Virginia, Maryland and Washington, DC.

Carlos now helps real estate agents grow their business by teaching business fundamentals, execution, and leadership.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}