"Conforming" Loans for Laymen

What is a “conforming loan”?

In layman’s terms, it conforms to standards that reduce the likelihood a borrower will default on making payments. “Standards” mean back to basics… i.e. substantial down payment, clean credit, and proof of income. Conforming loans have (semi) government backing that insures against default. Since the risk of making these loans is not too high, investors are willing to charge a relatively lower interest rate, compared to loans they could otherwise make to individuals with inferior qualifications, or without the government-backed insurance.

What’s in it for you?

You get a low interest rate if you qualify.

How do you qualify?

Why are
“conforming rates” buzzing in the news?

Because they are close to their 50-year historic lows. With no points, you can get a 5.5% 30yr fixed rate loan. If you paid a point or two, you could lower the rate to ~5%.

What are points?

One point means one percentage point of your loan amount… so one point on a $400,000 loan means an extra cost of $4,000.

Want to view a “Rent vs Own” comparison?

The following chart shows the monthly payment for different purchase prices, after putting 20% down, at 5.5% and at 5%. It also estimates the total extra cost needed to buy vs rent:

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