As a mortgage shopper in the market for a new home or a refinance, you may encounter terminology that requires some explaining. You must understand the features that apply to the various mortgage plans before you can make an informed decision and choose the best loan for your situation. When your loan amount meets federal guidelines for conventional financing, your loan is considered "conforming." If your loan's interest rate will not change at any time during the repayment term, it's consider "fixed." Conforming fixed loans are common mortgage programs.
Conforming Mortgage Features
Conforming mortgages adhere to federal guidelines for Fannie Mae and Freddie Mac loans. Fannie and Freddie are government-sponsored enterprises that buy and sell mortgages after lenders originate the loans. This secondary mortgage market activity frees up funds so that mortgage lenders can make more loans. The 2014 conforming loan limit was $417,000 for a single-family home in the continental U.S.
Fixed-Rate Loan Features
A fixed-rate loan provides the most stable monthly payment because the interest rate stays the same for the life of the loan. Some mortgage borrowers like the predictability of monthly payments because they don't have to worry about their rate increasing in the future, causing a higher payment. A fixed mortgage may carry a higher interest rate than its adjustable-rate counterpart, despite the reduced risk associated with this type of loan.
Conforming Fixed Loan Competition
A conforming mortgage offers better rates and lower monthly payments than "jumbo" non-conforming loans. Jumbo loans aren't eligible for purchase by Fannie and Freddie; so, jumbo-loan lenders keep the loans and remain responsible for them until repayment. This level of commitment makes jumbo loans more expensive and harder to get. Adjustable-rate mortgages may offer lower interest rates than fixed loans initially, but they adjust after a certain amount of time, such as two, five, seven or 10 years.
Size and Location Affect Conforming Limits
Conforming limits in Alaska, Guam, Hawaii and the U.S. Virgin Islands are higher than in the continental U.S. due to the cost of building and financing homes in these areas. Also, certain counties within the U.S. are considered high cost and have higher conforming loan limits. In 2014, there were 18 high cost areas, including pricey California coastal areas of San Diego, San Francisco and Los Angeles and New York, Newark and New Jersey. Increased conforming limits also apply to two-, three- and four-unit properties.