What is a Conventional Loan?

couple purchased house with conventional loan from David JacobsonA fixed-rate mortgage (FRM) is a mortgage loan in which the interest rate does not change throughout the loan’s term; in other words, the interest rate does not adjust or “float.” The result is that both payment amounts and the conventional loan’s duration remain the same, and individuals responsible for paying the loan are able to enjoy a consistently regular payment option and are more easily able to plan a budget surrounding the payment.

Fixed-rate mortgages are the most classic form of conventional loan for home and product purchasing in the United States. The most common terms are 15-year and 30-year mortgages, but shorter terms are available, and 40-year and 50-year mortgages are now available (the latter are quite common in areas with high priced housing, where even a 30-year term leaves the mortgage amount out of reach of an average family).

In addition, conventional loans in Springfield MO are typically more expensive than adjustable rate mortgages. Due to the interest rate risk, long-term fixed rate conventional loans will tend to be at a higher interest rate than short-term loans. The relationship between interest rates for short and long-term loans is represented by a yield curve, which generally has a tendency to slope upward; subsequently, longer terms tend to be more expensive. The opposite circumstance is known as an inverted yield curve and occurs less often.

However, although a fixed-rate mortgage has a higher starting interest rate, that does not indicate it is a worse form of borrowing compared to adjustable rate mortgages. If interest rates rise, the ARM cost will be higher while the FRM will remain the same. That being said, mortgage lenders will agree to take the interest rate risk on a fixed-rate loan, leaving you free from paying more due to rising rates. The price of potentially saving money is balanced by the risk of potentially higher costs. In each case, a choice would need to be made based upon the loan term, the current interest rate, and the likelihood that the rate will increase or decrease during the life of the loan. It is best to discuss this in-depth with a mortgage lender like David Jacobson at Oakstar Bank to see what would be best for you.

Conventional Loan Calculations

Payments for your conventional loans through David Jacobson – OakStar Bank will typically be calculated based on the following aspects:

  • The amount of loan taken out
  • The interest rate
  • The compounding frequency
  • The duration

Have you taken a look at Dave’s advice on first time home buyer programs Springfield MO yet?