Before you start shopping for that chic new apartment, it's worth figuring out what your financing options are. Mortgages come in all shapes and sizes, and the two biggest factors impacting your decisions will be the type of mortgage and the length of the mortgage term. A 15-year conforming mortgage is one that meets the requirements of Fannie Mae and Freddie Mac, where your monthly obligations are calculated over a 15-year repayment schedule.
If you take out a mortgage with a 15-year term, the bank will calculate your monthly payments on the basis that you'll pay off the loan over 180 months. The "conforming" part means that your loan meets the lending guidelines of Fannie Mae and Freddie Mac, which are established by the federal government.
What Is a Conforming Mortgage?
Fannie Mae and Freddie Mac do not provide mortgages to borrowers. Rather, they buy and guarantee loans via the secondary mortgage market. When a borrower gets a home loan from a bank, the bank will try to sell the mortgage to Fannie or Freddie. The bank receives a steady stream of cash from these mortgage-product sales that it can then use to lend more money to homebuyers.
Fannie and Freddie will only buy certain types of loans, and the mortgages they purchase must meet strict criteria. These loans are called "conforming loans."
Conforming Loan Criteria
To qualify as "conforming," the mortgage loan must be less than a certain amount of money. In 2019, the general limit is $484,350, although larger maximums apply in areas with a high cost of living. A loan above the limit is classified as a jumbo loan. These loans are risky for lenders and typically come with a much higher interest rate, since Fannie and Freddie will not buy them.
The loan must also meet other requirements for Fannie and Freddie to buy a mortgage, notably income requirements and a minimum FICO credit score of around 620.
Conforming loans are less risky for lenders because the lender can sell them in the secondary market. As a result, conforming loans tend to carry lower interest rates than loans that do not conform to Fannie and Freddie's standards. It's often worth putting more money down to stay under the maximum conforming loan limit so you can benefit from these lower rates.
What's a Typical Mortgage Term?
The 15-year part of the "15-year conforming mortgage" definition describes the term of the mortgage. A mortgage term is the length of time used to "amortize" your payments. What this means is that the lender spreads the loan amount and interest evenly over 15 years – that's 180 fixed monthly payments – such that the very last payment will completely pay off the loan.
Although you can get a mortgage term for just about any period (usually in five-year increments), 15 and 30 years are the most common mortgage terms for residential mortgages in the United States. According to Freddie Mac, around 90 percent of homebuyers choose the 30-year option.
Save Money With a 15-year Conforming Fixed Rate Mortgage
Opting for a shorter-term loan means the monthly payment will be higher, which initially can make a 15-year term mortgage seem less affordable. However, compared to a 30-year mortgage, a 15-year conforming fixed rate mortgage could potentially save a lot of money in interest charges.
With any type of term mortgage, the monthly payment is fixed. Some of the money goes towards the loan principal (the amount you borrowed) and some of it pays the interest charge, which the bank applies annually to the outstanding balance of the loan. In the early years of a mortgage, because the account balance is so high, most of the payment is interest. But in a 15-year loan, the balance shrinks much more quickly, so you end up paying less interest overall.
The higher the interest rate, the bigger the saving. At 4 percent, for instance, you would pay less than half the interest you'd pay over a 30-year loan. Run the numbers through an online mortgage calculator, and you'll quickly see the type of savings you can make.
- Bankrate: Conforming Mortgage
- Federal Housing Finance Agency: FHFA Announces Maximum Conforming Loan Limits for 2019
- Best Current Fixed 15-Year Mortgage Rates + 15YR FRM Refinance Rates: Compare Today's 15 Year Mortgages Interest Rates
- Federal Housing Finance Agency: Fannie Mae and Freddie Mac
- The Federal Reserve Board. "The Influence of Fannie and Freddie on Mortgage Loan Terms." Accessed Oct. 7, 2020.
- Fannie Mae. "Eligibility Matrix," Page 1. Accessed Oct. 7, 2020.
- Consumer Financial Protection Bureau. "What Happens if My Mortgage Is Sold? Is My Loan Safe?" Accessed Oct. 7, 2020.
- Federal Finance Housing Agency. "FHFA Announces Maximum Conforming Loan Limits for 2020." Accessed Oct. 7, 2020.
- Consumer Financial Protection Bureau. "How Can I Find the Loan Limit for a Conforming Loan in My County?" Accessed Oct. 7, 2020.
- FHFA.gov "Fannie Mae and Freddie Mac Maximum Loan Limits for Mortgages Acquired in Calendar Year 2020 and Originated after 10/1/2011 or before 7/1/2007," Page 62. Accessed Oct. 7, 2020.
- PennyMac Loan Services. "Conforming vs. Non-conforming Loans: Which Is Best for You?" Accessed Oct. 7, 2020.
- Fannie Mae. "97% Loan to Value Options." Accessed Oct. 7, 2020.
- Freddie Mac. "Reach Your Dreams With 3%." Accessed Oct. 7, 2020.
- Freddie Mac. "Additional Requirements for Borrowers With Usable Credit Scores." Accessed Oct. 7, 2020.
- Fannie Mae. "Selling Guide." Accessed Oct. 7, 2020.
- Fannie Mae. "Guaranteed Mortgage Pass-Through Certificates (Single-Family Residential Mortgage Loans," Page 70. Oct. 7, 2020.
- Consumer Financial Protection Bureau. "What Is a Conventional Loan?" Accessed Oct. 7, 2020.
- Consumer Financial Protection Bureau. "Conventional Loans." Accessed Oct. 7, 2020.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.