Conventional Financing

Conventional
Financing

Conventional financing is perfect for:

Borrowers With Good or Excellent Credit

Borrowers Who Can Contribute a 3% Down Payment

What Is Conventional Financing?

Conventional loans comply with the FHFA’s conforming loan limits and eligibility criteria. Homebuyers favor them because they require just a 3% minimum down payment and offer a variety of loan terms and interest-rate options to suit different financial needs.

Conventional financing encompasses mortgage loans originated by private lenders and subsequently purchased by Fannie Mae or Freddie Mac, without any federal government insurance or guarantee. Unlike FHA and VA programs—where the government backs all or part of the loan—conventional loans are funded entirely through the private sector, relying on investors’ capital rather than taxpayer dollars. These mortgages can be used to purchase or refinance residential properties ranging from single-family homes to four-unit multifamily dwellings, and they offer a variety of term lengths, interest-rate structures, and down-payment options to suit different borrower profiles.

Types of conventional financing:

Fixed-Rate

A fixed-rate mortgage is a type of home loan where the interest rate remains constant throughout the entire term of the loan.This means:

Your monthly principal and interest payments will never change, regardless of fluctuations in the broader economy or interest-rate markets.
Even if national interest rates rise or fall, your rate is locked in from the beginning.

Why It Matters

Predictable Budgeting
Since your monthly payment stays the same, it’s easier to plan your finances over the long term. You won’t be surprised by sudden increases in your mortgage payment.
Long-Term Security
Fixed-rate mortgages are especially popular for long-term financing options, such as 30-year loans. Even over three decades, your rate and payment won’t change.
Protection Against Inflation and Rate Hikes
If interest rates rise in the future, you’re protected. You’ll continue paying the same rate you locked in when you first took out the loan.
Simplicity
Fixed-rate loans are straightforward and easy to understand, making them ideal for first-time homebuyers or anyone who values consistency.

Adjustable-Rate (ARMs)

An adjustable-rate mortgage (ARM) is a type of home loan where the interest rate is not fixed for the entire term. Instead, it starts with a lower introductory rate for a set period, and then the rate adjusts periodically based on market conditions.

How It Works

Introductory Period
- Most ARMs begin with a fixed interest rate for a short term — typically 3, 5, 7, or 10 years.
- During this time, your monthly payments are stable and often lower than those of a fixed-rate mortgage, making it attractive for short-term homeowners.
Adjustment Period
- After the initial fixed period ends, the interest rate adjusts at regular intervals (usually annually).
- The new rate is based on a benchmark index (like the SOFR or Treasury rate) plus a margin set by the lender.
- This means your monthly payments can go up or down depending on market interest rates.
Rate Caps
ARMs typically include rate caps to limit how much the interest rate can change:
- Initial Cap: Limits the first adjustment.
- Periodic Cap: Limits each subsequent adjustment.
- Lifetime Cap: Limits the total increase over the life of the loan.