¶ How Conventional Mortgage Loans Work

Fannie Mae™ Conventional Fixed Mortgage

Author: Ryann Cairns
Visit The Authors Website: www.sosdebt.org

It can often be hard to choose among the many different types of mortgage plans available today. At one time consumers had very few choices in home mortgage financing options; today however the options flourish and it can be hard for consumers to choose among the many different types of home mortgage financing plans.

Adding to the confusion among many prospective homeowners are the effects the Federal Reserve can have on the home mortgage market and prime mortgage interest rates. The Fed, which is also known as the Federal Reserve, has been given the responsibility of insuring that the country enjoys a favorable economic climate.

Among the many tasks that the Fed undertakes to insure a healthy economy is the regulation of the money flow as well as interest rates. As a result, the Fed directly controls the amount of money that banks are required to maintain reserve which is not available for mortgage loans.

What this means to prospective homebuyers is that depending on the economy of the country at a given time, there may not be much money available for mortgage loans when the time comes for them to purchase a home. Even if the consumer has a good credit rating they may still not be able to get a home loan.

Obviously, this can create a number of problems for innumerable consumers. In order to counteract the necessary restrictive actions of the Federal Reserve, the secondary mortgage market has been established. The secondary mortgage market makes it possible for consumers to still be able to obtain home mortgage loans even if the Federal Reserve has found it necessary to slow down the economy by restricting the amount of money available for loans.

Home loans that are made by traditional mortgage lenders are sold to the secondary mortgage market in order to free up the amount of money that is available for home mortgage loans without exceeding the amounts of money available for home loans set by the Federal Reserve.

Most home loans that are purchased through the secondary mortgage market are bought through warehousing agencies. Fannie Mae, the Federal National Mortgage Association, is the largest of these warehousing agencies and is responsible for helping innumerable consumers make home purchases each year.

A large number of individuals opt for a fixed rate Fannie Mae mortgage loan. At one time a fixed rate loan was about the only choice consumers had in home financing options. There are other options now available today, however a fixed rate loan continues to be the most popular.

With a fixed rate loan, the mortgage loan the consumer takes out is originated at whatever the prime market interest rate is at the time they apply for the mortgage loan. In some cases, there may be a slight difference if the consumer's credit is not perfect and the lender feels they need to insure an increased risk by raising the interest rate offered to the consumer. The fixed rate mortgage loan maintains that same interest rate throughout the course of the mortgage loan, until it is either paid off or the customer decides to refinance the mortgage loan.

There are both advantages and disadvantages to a fixed rate mortgage loan. One of the most obvious advantages to a fixed rate Fannie Mae mortgage loan is that the customer never has to worry about their monthly mortgage payment changing as is common with an adjustable rate mortgage. For customers who are interested in knowing exactly how much their monthly bills will be for budget purposes, this can be a great benefit.

The downside to a fixed rate Fannie Mae Mortgage loan is that should the prime market interest rate decrease from the rate the customer's mortgage loan was originated at, the consumer will not be able to take advantage of the lower rate and save money in interest payments. While there is always the option of refinancing a loan, there are restrictions regarding the number of times a mortgage loan can be refinanced. Despite this fact, fixed rate Fannie Mae mortgage loans continue to be popular for consumers who are not natural risk takers.

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