Overview of the Many Different Types of Mortgages

If you’re new to the mortgage scene, you’re probably curious about the different types of home loans for first-time buyers You’ve heard lingo like FHA, VA, conventional, and maybe even specifics such as a 10-year adjustable-rate mortgage. We want to help you go from confused to confident when it comes to types of mortgage loans. Today, we’ll explore the pros and cons of each – plus, who they’re best suited for so you can choose the best type of mortgage loan for you.

Mortgages fall into three overarching categories: rate structure, backing, and loan size. Options within those categories are then combined to create specific loan types like VA fixed rate or jumbo ARM.

Types of Mortgage Rates: Fixed vs. Adjustable Rate Mortgages

Any mortgage loan may be offered in two different rate structures: fixed or adjustable rates. While both types typically offer terms of 15, 20, or 30 years, they have significant differences.

Fixed rate mortgage

A fixed rate mortgage has the same interest rate for the entirety of its term. That means your mortgage payment will stay consistent throughout the life of the loan. Fixed rates tend to be popular when rates are low because you can rest assured it’s locked in and won’t change.

Pros of a fixed rate mortgage:

• Know all of your payments up front.
• If you locked in a low rate, it won’t change.
  

Cons of a fixed rate mortgage:

• If you locked in a less desirable rate, it won’t change unless you refinance at a later time.

Fixed rates may be best suited for:

• The risk-averse borrower who prefers to “set it and forget it.”
• When interest rates are historically low.
  

Adjustable rate mortgage

Conversely, an adjustable rate mortgage (ARM) starts with a fixed rate for a specified period and then shifts to a variable rate. During the variable period, an ARM’s rate can fluctuate. ARMs are viewed as a riskier option because you can’t always predict which way they’ll go.

Pros of an adjustable rate mortgage:

• The fixed rate period usually has a lower rate than other mortgage options, saving you money during the first years of the loan.
• If rates fall during the adjustment period, you could save considerable money compared to a fixed rate.
  

Cons of an adjustable rate mortgage:

• You don’t know your payment schedule or full cost of the loan ahead of time.
• If rates rise, you could pay significantly more in interest over the life of the loan.
  

ARMs may be best suited for:

• The risk-tolerant borrower who’s not afraid to monitor rates and refinance if necessary.

Conventional or Government-backed Mortgages

Our second category relates to whether a mortgage is backed by the U.S. government. Put simply: Is the loan offered through a private lender or has a government agency agreed to guarantee the loan? Government-insured home loan programs create opportunities for borrowers that may not meet the requirements of a conventional loan.

Conventional mortgage loans

A conventional loan is not secured or offered by a government agency. Available through private lenders, they’re the most common type of mortgage on the market. Combining with options in our first category, you can choose between ARM and fixed rate conventional loans.

Pros of a conventional loan:

• With good credit and a strong down payment, you may pay less for the loan overall.
• Avoid paying private mortgage insurance (PMI) with a 20 percent or higher down payment.
  
• Limited restrictions for second homes or investment properties.
  

Cons of a conventional loan:

• Stricter qualifications compared to loans that are government-insured.
• PMI is required for low down payments until your equity reaches 20 percent.
  

Conventional loans may be best suited for:

• The individual with a favorable credit history and has funds available for a down payment.

FHA loans

This government-backed loan program is insured through the Federal Housing Administration (FHA). An FHA loan can make the dream of homeownership a reality for first-time homebuyers and those with less than perfect credit. It’s usually possible to get into a home with very little upfront costs.

Pros of an FHA loan:

• Qualified borrowers can get an FHA loan with as little as 3.5 percent down.
• If you don’t have money for a down payment, you can use a monetary gift from a family member, friend, employer, charitable organization, or government agency.
  
• Upfront expenses can be reduced by rolling closing costs into the loan or having the seller pay some fees.
  
• Credit qualifications for FHA loans are often less strict than conventional loans.

Cons of an FHA loan:

• All FHA loans come with mortgage insurance premium (MIP), an extra cost to your monthly payment.
• Paying less upfront means you’ll likely end up paying more for the loan overall.
  
• Property restrictions can limit your housing options.
  
• The purchased property must be used as your primary residence.
  

FHA loans may be best suited for:

• The first-time or cash-strapped homebuyer unable to meet the requirements of a conventional loan.

VA loans

Another common government-backed mortgage type is insured by the Department of Veterans Affairs (VA). VA loans are special mortgage loans available only to eligible military servicemembers, veterans, and surviving spouses. They can offer eligible individuals more favorable terms for buying, building, improving, or refinancing a home.

Pros of a VA loan:

• No down payment is required, allowing you to finance up to 100 percent of a home purchase.
• VA home loans generally have lower interest rates than conventional or FHA loans.
  
• No mortgage insurance is required.
  
• Some closing costs may be paid by the seller, further limiting your upfront costs.
  

Cons of a VA loan:

• Unless you’re exempt, your loan will have an additional cost called a VA funding fee.
• The home must be your primary residence and meet the VA’s minimum property requirements (MPRs)

VA loans may be best suited for:

• An eligible veteran, servicemember, or military spouse who wants to take advantage of a VA loan’s unique features.

Mortgage Size: Conforming or Jumbo Mortgages

Last, how much money do you plan to borrow? A mortgage is categorized as either conforming or non-conforming (jumbo) based on whether the loan size is within a specified lending limit.

Conforming loans

The definition of a conforming loan is simple: It fits within an entity’s lending limits. For a conventional loan in 2022, the limit set by the Federal Housing Finance Agency (FHFA) for a single-unit property was $647,200. VA and FHA loans can have different limits. Generally, you can assume a loan is conforming if it isn’t specified as non-conforming or jumbo.

Pros of a conforming loan:

• More lenient qualifications compared to a non-conforming loan.

Cons of a conforming loan:

• Cannot exceed the maximum loan amount, reducing inventory or location options.

Conforming loans may be best suited for:

• A homebuyer purchasing an average-valued property in most areas of the country.

Jumbo mortgage loans

If you need to borrow more than a conforming loan limit, the mortgage is considered jumbo. Luxury homes and properties in competitive markets often require jumbo loans. Although jumbo loans can help you buy more expensive homes, they can be more cumbersome to obtain. Here are the advantages and disadvantages.

Pros of a jumbo loan:

• Access higher-end properties or homes in places with high costs of living, such as California, New York, Washington D.C., Alaska, and Hawaii.
• Some lenders will approve jumbo loans with a low down payment of 5 to 10 percent.
  
• Interest rates are competitive.
  

Cons of a jumbo loan:

• Can be more challenging to qualify for, often requiring a higher credit score, lower debt-to-income ratio (DTI), and cash reserves.
• It’ll likely require more paperwork, and closing costs can be higher.
  
• Lenders can have strict property restrictions such as no second homes, foreclosures, or short-term sales.
  

Jumbo loans may be best suited for:

• A higher income individual shopping for an expensive property that can meet the strict requirements to qualify.

Best type of mortgage loan

Now that you’re aware of the many different types of home mortgages, you’re on the way to choosing the best option for you. It’s important to understand your individual situation and know what you’re looking for, and a good loan officer will sit down with you and help you weigh your options.

First-time homebuyer? Explore the 4 stages of buying your first home.