There are two kinds of conventional loans. One is a "fixed rate mortgage" and the other is 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. For as long as you have your loan, the total amount of your principal plus interest will not increase.
- 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.
- Rate caps – control how much your rate can increase.