Types of Mortgages You Should Know

As you start to consider buying a home, it is a good idea to get an understanding of the home loan options that are available to you, how they differ, and why one might work better than another for your financial needs. While there are many different types of mortgages, there is no one-size-fits-all loan. Different loan programs fit different borrower’s various needs.

In this article, we will give you the details about the different types of mortgages, along with the rate and term structures you will have to choose from when you start applying for your own home loan.

Types of mortgage loans

There are two main categories of mortgages:

• Conventional loans

• Government-backed loans

A conventional mortgage is not guaranteed by a government entity like the U.S. Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA). Conventional mortgages are available through private lenders like banks and credit unions and may be sold to a government-sponsored enterprise such as Fannie Mae or Freddie Mac.

Government-guaranteed loans include VA and FHA loans. Both the VA and FHA work hard to provide borrowers with low down payment options so that individuals and families can fulfill their dreams of homeownership.

Below, you can find more details on these two mortgage categories, along with the specific types of home loans that fall under each.

Conventional loans

A conventional loan is available through private lenders, and they are the most common type of mortgage on the market. This type of home loan is not secured or offered by a government agency and typically comes in several different term options with the most common being 15- and 30-year loans. You will also have the ability to choose between adjustable-rate mortgages (ARM) and fixed-rate conventional loans.

Pros of a conventional loan:

• Can be used for a primary home, second home, or investment properties

• Offers flexible terms (often 15, 20, or 30 years)

• Borrowers can avoid paying private mortgage insurance (PMI) with a 20% or higher down payment

• Borrowers who provide less than a 20% down payment can request removal of private mortgage insurance (PMI) once home equity reaches 20% of the original purchase price

Cons of a conventional loan:

• Stricter borrower qualifications compared to loans that are government-insured

• PMI is required for low down payments until your equity reaches 20%

Conventional loans are either conforming or non-conforming loans. The difference between the two types is the amount you can borrow. For 2026, most of the continental U.S. has a conforming limit of $832,750 for one-unit properties.

In high-cost areas, that limit is increased to $1,249,125. Anything over those limits would be considered a non-conforming loan, also known as a jumbo loan. Although this type of mortgage can help you afford more expensive homes, they often have stricter requirements and borrower qualifications that can make them more difficult to obtain.

Jumbo loans

Freddie Mac and Fannie Mae are two government-sponsored entities that set the conforming credit standards and loan limits that they will purchase. Jumbo loans are loans that exceed the amount that Fannie Mae or Freddie Mac will purchase. This means they can be harder to get because there is more risk for the lender. Also, because a jumbo loan exceeds the Federal Housing Finance Agency (FHFA) limits, it cannot be purchased by either Freddie Mac or Fannie Mae. Instead, private investors buy these loans.

Jumbo loans are mainly for larger homes and vacation properties. If you have a lower credit score and you do not have a large down payment, you may not qualify for a conventional jumbo loan.

Pros of a jumbo loan:

• Borrowers can 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 may approve jumbo loans with a low down payment of 5 to 10 percent (though lower down payments may come with higher interest rates)

Cons of a jumbo loan:

• May require a larger down payment

• Typically have higher interest rates

• Higher closing costs and fees

• Process to secure a jumbo loan can take more time because there is more involved

Conforming conventional loans versus jumbo loans

If you are deciding whether a conforming conventional loan or a jumbo loan is right for your homebuying goals, here is a side by side comparison:

 

Government-backed home loans

Government-insured home loan programs create opportunities for borrowers that may not meet the requirements of a conventional loan. There are two main types of loans in this category—VA loans and FHA loans.

VA home loans

VA loans are government-backed loans that offer highly competitive interest rates with little to no down payment required. VA mortgages provide a great path to homeownership. However, they are only available to eligible military service members, veterans, and surviving spouses. They can offer eligible individuals more favorable terms for buying or building a home.

There are some great benefits to a VA loan if you qualify. You can typically purchase a home with less money out of pocket with the down payment being zero or very low if eligibility requirements are met. Your lender will need your Certificate of Eligibility (COE) to determine eligibility. And if you already have a VA loan and are looking to refinance for a lower payment or a shorter term, you may be eligible for a VA Interest Rate Reduction Refinance Loan (IRRRL). You will need to certify that you previously occupied the property as your primary residence, but these refinance typically don’t require an appraisal nor income and asset verification.

Pros of a VA loan:

• May offer better terms and interest rates

• If eligibility requirements are met, there is no down payment required for a VA loan

• No need for either PMI or MIP

• Fewer closing costs associated with VA loans

Cons of a VA loan:

• While there may be no down payment required, there is a funding fee

• The funding fee increases when you reuse VA loan benefits

• Higher housing standards compared to conventional loans, as the VA sets the appraisal standards

FHA loans

A Federal Housing Administration (FHA) loan is issued by an approved lender and backed by the FHA. Since this is another type of government-backed loan, like a VA loan, there is typically a smaller down payment required.

There are lending limits for FHA home loans. The U.S. Department of Housing and Urban Development (HUD) provides a page that allows you to look up the FHA loan limits based on geographic area. Also, credit score requirements are less strict than with conventional loans.

Pros of an FHA loan:

• Qualified borrowers can get an FHA loan with as little as 3.5% down

• Up-front expenses can be reduced by having the seller pay up to 6% of the sale price of the property

• Credit qualifications for FHA loans are often less strict than conventional loans

Cons of an FHA loan:

• All FHA loans come with MIP, which adds to both your upfront costs and your monthly payment
• Property restrictions can limit your housing options

Types of mortgage rates: Fixed- versus 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 mortgages

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 is locked in and will not change.

Pros of a fixed rate mortgage:

• Know all of your payments up front

• If you locked in a low rate, it will not change

Cons of a fixed rate mortgage:

• If you locked in a less desirable rate, it will not change unless you refinance at a later time

Adjustable-rate mortgage

Conversely, an adjustable-rate mortgage 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 cannot always predict which way they will go. The type of ARM you have is reflected in the amount of time the introductory rate stays the same.

For example, if you have a 5/1 ARM, the introductory rate will stay the same for five years. After five years, the rate can change each year depending on rate indexes and margins.

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 do not 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

What are ARM rate indexes and margins?

There are many different types of rate indexes, and your loan officer will explain which index rate is being used with your loan. Margins are percentage points above the rate index. For example, if the current rate index is 1.5% and the margin is 2.5%, your interest rate for that year would combine the two different rates to a total of 4%. Index rates can change, but your margin rate will typically stay the same over the life of the loan. Therefore, with an ARM, you are hoping that index rates drop over time and do not go up—or you will end up paying more each month for your mortgage.

Mortgage terms timelines

Aside from the two different mortgage rate options, you may also have to choose the type of mortgage term that will work best for you. The term (or length) of your mortgage loan is how long you will have to pay it off. The most common terms for fixed-rate loans are 15, 20, and 30 years. The term for ARMs is typically 30 years with the initial term before rate adjustment being either 3, 5, 7, or 10 years.

What type of mortgage is best for you?

The first step to starting on your journey from curious homebuyer to confident homeowner is determining which type of mortgage and rate will be best for your financial needs.

Now that you know the many different types of home mortgages, you are on the way to choosing the best option for you. It is important to understand your individual situation and know what you are looking for, and a loan officer can also sit down with you and help you weigh your options.