Conforming Loans

Conforming loans are loans that follow the terms and condition set by the Fannie Mae and the Freddie Mac.  It can be a fixed rate mortgages, adjustable rate mortgages, balloon mortgages or hybrid loans.

Fixed rate mortgage are the most common mortgage for first-time homebuyers because they are stable.  Its monthly mortgage payment remains the same for the entire term of the loan, whether it is a 15-year, 20-year, or 30-year mortgage loan.  Because the interest rate may be higher than other types of loans, such as the Adjustable–Rate mortgage, the borrower may not be able to qualify for a large loan with a Fixed-rate mortgage.  Nevertheless, there is less risk in this type of loan.  The borrower always knows what their mortgage payment is, regardless of the current interest rate.  The interest rates never go with the flow of the economy.

Adjustable rate mortgages (ARMs) are popular because they usually start with a lower interest rate and a lower monthly payment.  The initial period can range from as little as six months to as long as ten years.  After, the initial period, most ARMs adjust the interest rate periodically.  At the end of the initial period and at every adjustment period, the interest rate can change based on the index and the margin.  The interest rate adjustments are based on a published index.  The two most commonly used by ARMs are the London Interbank Offered Rate (LIBOR) and the U.S. Constant Maturity Treasury (CMT).  The margin is the percentage that can be added to the index.

Hybrid loan is a type of ARM that has a fixed interest rate for a certain period of time and then the interest rate adjusts for the remainder of the loan, like a conventional ARM. There are several types of hybrid ARMs, such as the 10/1, 7/1, 5/1, and 3/1. The first number (10 for example) is the length of the initial period, during which the interest rate doesn’t change. The second number (1 for example) is how often the ARM is adjusted after the initial period. So, the interest rate on a 10/1 ARM won’t change for the first 10 years, but can change in the eleventh year and be adjusted every year after that up to a maximum amount.

A balloon mortgage usually offers a low monthly payment for an initial period of time.  After that period of time elapses, the balance must be paid by the borrower or the amount must be refinanced.  The large sum payable at the end of the loan term is called the “balloon payment.”

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