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As a home buyer in California, you have many different options when it comes to your mortgage financing.
For example, you could choose a government-backed mortgage program like FHA, or a conventional home loan. You also have options when it comes to the length or “term” of the loan. And you can choose between a fixed and adjustable interest rate.
But when it comes to overall popularity, there’s one type of mortgage loan in California that rises above all others. It’s the 30-year fixed-rate conventional home loan. This is by far the most popular financing strategy among home buyers in California and nationwide.
Today, we will break this loan down into its individual components, to better understand the benefits and advantages it provides.
The Most Popular Type of Mortgage in California
A California Association of Realtors report from a couple of years ago showed that 83% of home loans in California have a fixed interest rate. Additionally, about 75% of loans had a 30-year term.
And according to a May 2023 report from the Mortgage Bankers Association: “conventional loans composed 66.2 percent of loan applications, FHA loans composed 23.4 percent. … VA loans composed 10 percent.”
Put these different components together, and you have the 30-year fixed-rate conventional loan, the most popular type of mortgage in California.
Granted, the ideal mortgage option can vary from one borrower to the next, and for a number of reasons.
For example, military members can often benefit from using the VA loan program. And those home buyers who only plan to keep a mortgage for a few years could benefit from using an adjustable-rate (ARM) loan. The best-case scenario is to choose the right type of financing for your particular situation.
Even so, the 30-year fixed-rate conventional is clearly the most popular type of mortgage loan in California.
But why? What makes this particular product so popular among home buyers in the Golden State? To answer that question, we have to break it down into its separate components…
Breaking Down the 30-Year Fixed-Rate Conventional
The 30-year fixed-rate conventional mortgage loan has three specific components that make it different from other financing options. It has a 30-year amortization or repayment term, a fixed interest rate that does not change, and a conventional designation that distinguishes it from programs like FHA and VA.
Here’s what these three primary components mean for you, as a borrower:
- Thirty years: With a 30-year mortgage, the borrower has 30 years, or 360 months, to repay the loan in full. (Though most people these days either sell or refinance long before that.) This extended repayment period allows borrowers to spread their payments over a longer time frame, resulting in lower monthly payments compared to shorter-term mortgages.
- The fixed rate: With this type of mortgage loan, the interest rate remains constant or “fixed” for the entire duration of the loan. When a borrower secures a 30-year fixed-rate conventional mortgage, they agree to a specific interest rate that will not change over the life of the loan, regardless of fluctuations in the market. This provides long-term stability and predictability, qualities that appeal to a lot of home buyers in California.
- The conventional aspect: The term “conventional” refers to the type of mortgage loan being utilized. A conventional mortgage is not guaranteed or insured by any government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
Benefits for Borrowers
The 30-year fixed-rate conventional mortgage loan is the most popular financing option for a reason. While it might not the best choice for every situation, it does offer some distinct advantages that appeal to a large number of borrowers.
Here are some of the most important benefits:
1. Avoiding mortgage insurance
FHA loans require borrowers to pay an upfront and annual mortgage insurance premium. This can increase the size of the monthly payments. But with a conventional loan, borrowers can avoid mortgage insurance as long as the loan-to-value ratio does not exceed 80%.
2. Cheaper mortgage insurance
Borrowers who use a conventional loan with less than a 20% down payment often have to pay for private mortgage insurance, or PMI. But even in those cases, PMI tends to be cheaper than the mortgage insurance associated with the FHA program (mentioned above).
3. Smaller monthly payments
By spreading the mortgage loan over a lengthy 30-year term, borrowers are able to reduce the size of their monthly payments. On the other hand, those who choose a shorter repayment term, like the 15-year mortgage, will end up with a significantly larger monthly payment. This makes the 30-year option ideal for California home buyers who want to minimize their monthly payments.
More buying power. Lower monthly payments can also make homeownership more affordable. With a 30-year mortgage, borrowers may be able to purchase a more expensive home while still maintaining manageable monthly payments. This can be particularly beneficial in relatively expensive real estate markets — and there’s no shortage of those in California.
Stable and predictable. A 30-year fixed-rate conventional mortgage loan lives up to its name by having a “fixed” interest rate for the entire life of the loan. This means your interest rate will never change (unless you were to refinance down the road). An ARM loan, on the other hand, has an interest rate that can change over time, bringing more uncertainty into the picture.
But Is It the Right Option for You?
When it comes to mortgage financing, different borrowers have different needs and objectives. For some people, minimizing the monthly payments is the top priority. Other borrowers might put an emphasis on reducing the total amount of interest paid over time.
This is why it’s so important to explore all of your options, before making a final decision.
As a California mortgage broker, we can help you choose the right type of loan for your particular situation. We offer a broad range of mortgage options, including everything mentioned in this article. Please contact our staff if you have financing-related questions or would like to apply for a loan.