Conventional Loan vs. Fixed Loan?

What is the differnce between conventional loan and a fixed loan?

2 Answers

A conventional loan is a type of loan, and a fixed loan is a loan product. Think of it this way, a dog is a kind of animal. A collie is a specific type of dog.

A conventional loan typically refers to a "conforming loan". This would mean a loan that is underwritten to Fannie Mae or Freddie Mac guidelines. There are certain guidelines and characteristics that make it a conventional loan. Typically the borrower can show income and assets that are enough to qualify for the loan, a conventional borrower also would typically have very good credit. Essentially the borrower has to measure up to the guidelines of Fannie Mae and Freddie Mac to obtain a conventional loan.

A fixed loan is a loan in which the interest rate is fixed for the entire length of the loan. The term of the loan itself can vary from 10 to 30 years, in most 5 year increments, however the interest rate will remain the same throughout the entire life of the loan.

A fixed loan, or fixed rate mortgage can fall under the Fannie Mae or Freddie Mac umbrella, or it may be a jumbo loan, or a non-conventional or subprime loan. Opposing a fixed rate loan would be an adjustable rate loan, these products vary widely as well, and can just as easily be a conventional adjustable rate loan as any other type of loan.

In the end, a conventional loan is a group of loan products that meet specific qualifying criteria. A fixed rate loan is just one example of a loan product.

The easiest way to understand a Conforming loan is that it's a loan for customers with good credit.  Just as Sub-prime loans were for people with less than perfect credit.  And while we're at it the term "sub-prime" is actually incorrect.  The correct way is Non-Conforming or Non-Conventional, but the media used the word sub-prime loosely.  A conventional loan falls under Fannie Mae and Freddie Mac guidelines (the largest purchasers of loans).

A Fixed loan is a loan where the interest rate is fixed for the entire term of 10,15,20. or 30 years.  Your mortgage payemnt stays the same throughout the term.