5 Types of Mortgage Loans

Types of Loans for Homebuyers and How To Choose

Two young women talking sprawled on floor at home
•••

Marco_Piunti / Getty Images

If you're like most people, you'll need to take out a mortgage to buy a home. According to the U.S. Census Bureau, 94% of people who bought a home in 2021 purchased it with a mortgage.

When you start shopping for a mortgage, it's easy to get overwhelmed. There are lots of different types of mortgages, each of which is better for some people than others. Here's how to tell which type of mortgage might be best for you.

Key Takeaways

  • Fixed-rate conventional loans are the most popular type of mortgage.
  • Choose an adjustable-rate mortgage if you're OK with the rate—and therefore your mortgage payment—changing every so often.
  • Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA) loans can be especially useful if you don't have a large down payment or have credit problems—though you'll also need to meet other eligibility criteria.

Fixed-Rate Mortgages

Fixed-rate mortgages are mortgages with a single interest rate that stays consistent over the entire life of the loan, whether that's 15, 25, or 30 years. Your interest rate will never change, regardless of what the economy does.

Each type of mortgage can be described with more than one classification. For example, every mortgage has either a fixed rate or an adjustable rate. You can have a fixed-rate FHA loan, for example, or an adjustable-rate conventional mortgage.

Why Homebuyers Use This Type of Loan

  • It's easier to budget for your mortgage payment because it'll stay the same for the whole term.
  • You won't have to worry about your payment drastically increasing if interest rates go up.

Limitations

  • Interest rates are usually a bit higher for fixed-rate mortgages than for adjustable-rate mortgages.
  • If you buy your home when interest rates are high, you're stuck with that rate unless you refinance.

Adjustable-Rate Mortgages

If you have an adjustable-rate mortgage (ARM), your payment amount may fluctuate a lot more than a fixed-rate mortgage would. Each ARM loan agreement describes how often the rate might adjust, how much it can adjust in any one step, and the lifetime limits on how high it can go.

Why Homebuyers Use This Type of Loan

  • Interest rates are usually lower than for fixed-rate loans—at least at the start of the loan.
  • Some homebuyers use ARMs to keep their payments lower near the beginning of the loan. This can work in their favor if they plan to resell or refinance the home, especially before the ARM's first-rate adjustment.

Limitations

  • ARMs can be a lot more confusing than fixed-rate loans.
  • Your payment can change significantly over the life of your loan, making it harder to afford your mortgage in the future.
2:48

Conventional Mortgages

A conventional mortgage is a term for any mortgage given out by a lender that isn't part of a government-backed program. If you don't qualify for any special mortgage programs, this is likely the type of mortgage you have. It's the most common mortgage type, making up 74% of all mortgages in 2021, according to the U.S. Census Bureau.

Typically, your lender will sell these conventional mortgages to either Fannie Mae or Freddie Mac. For your mortgage to be sold to one of these entities, it must conform to their guidelines, hence why these mortgages are often called conforming loans.

Why Homebuyers Use This Type of Loan

  • They may not qualify for other types of mortgages with more favorable terms, like VA loans.
  • Interest rates may be lower than for some other types of loans, such as FHA loans.

Limitations

  • You may be required to pay an extra fee for private mortgage insurance (PMI) if you make a down payment of less than 20%.
  • It can be more difficult to get approved if you have a lower credit score or recent credit dings.

Mortgages Backed by Government Programs

VA Loans

If you're a veteran or active-duty service member, VA loans can be very lucrative. Overseen by the Department of Veterans Affairs, these home loans generally offer the cheapest rates of all the different types of mortgages. VA loans require no down payment (although sometimes it's good to put as much down as you can). If you have a lower credit score or negative credit information on your file, it may also be easier to get approved for a VA loan than for other types of mortgages.

FHA Loans

Regulated by the Federal Housing Administration, FHA loans are designed to make homeownership more accessible for people who might not otherwise qualify because they don't have the greatest credit score or haven't managed to save up a large down payment. FHA loans tend to be more expensive than conventional loans, but you may be able to get approved with a credit score as low as 500 and a down payment of just 3.5%.

USDA Loans

If you live in a rural area and you're not a high-income earner, the USDA loan program might be right for you. You won't need a down payment (but you might still want to put down as much as you can afford). You may also have to pay an extra fee for mortgage insurance, but even so, these loans are usually cheaper than FHA loans.

Why Homebuyers Use These Types of Loans

  • VA loans are typically the cheapest mortgage options for current and former service members.
  • FHA and USDA loans can unlock home ownership for people who might not otherwise be approved for a conventional mortgage, either because of credit issues or a lack of down payment savings.

Limitations

  • These loans may take longer to close because properties need to be inspected and meet loan requirements.
  • USDA and FHA loans are typically more expensive than conventional loans for people with good credit and larger down payments saved up.

Jumbo Mortgages

Jumbo mortgage is a broad term for any type of mortgage that is bigger than the limits of common mortgage programs.

For example, if a conventional mortgage is larger than what Fannie Mae or Freddie Mac will buy, then it's a jumbo non-conforming mortgage. "Non-conforming" comes from the fact that it doesn't conform to the limits set by those organizations. Similarly, a veteran may be able to use a VA loan to buy a house that costs more than the program's limit. In this case, the borrower would have a jumbo VA loan.

Why Homebuyers Use This Type of Loan

  • Jumbo loans can be used to purchase expensive properties, such as luxury homes.
  • In areas with a high cost of living, a jumbo loan may be required to purchase even a median-value home.

Limitations

  • May require better credit and a high income for approval.

How To Tell Which Loan Type Is Right for You

The right mortgage for you will depend on your circumstances, including your:

  • Credit score and history
  • Down payment
  • Income
  • Ability to take advantage of special types of mortgages, like USDA or VA loans

If you're ready to start thinking about buying a home, make sure to find a good mortgage lender. They'll work with you to find the best type of mortgage for you and help turn your homeownership dreams into reality.

Frequently Asked Questions (FAQs)

What types of mobile homes qualify for a mortgage?

Many lenders offer mortgages for mobile homes, and they'll each have specific requirements that your (potential) mobile home needs to meet. For example, FHA Title I loans require the mobile home to meet the Model Manufactured Home Installation Standards, and the list of acceptable construction methods is 35 pages long.

Which types of banks offer the best home loans?

You can get mortgages from big banks like Wells Fargo or Bank of America, but you'll also find good home loan options by working directly with banks and credit unions based in your community. Local mortgage brokers who work with multiple lenders can also help you shop around and identify the best home loan for your situation.

Is a fixed-rate mortgage best?

If you are able to lock in low rates, a fixed-rate mortgage will allow you to keep making the same low payments going forward even if interest rates rise in the future. If you think interest rates are high and may fall, you may want to consider an adjustable-rate mortgage (ARM)—but if you have a fixed-rate mortgage and rates fall, you can usually refinance.

Article Sources

  1. U.S. Census Bureau. "New Residential Construction," See "Table Q7. New Houses Sold by Type of Financing."

  2. U.S. Department of Veteran Affairs. "VA Home Loans."

  3. U.S. Department of Housing and Urban Development. "Mortgagee Letter 10-29," Page 2.

  4. Consumer Financial Protection Bureau. "FHA Loans."

  5. U.S. Department of Agriculture. "Single Family Housing Programs."

  6. ICE Mortgage Technology. "Origination Insight Report, September 2021," Page 5.

  7. U.S. Department of Housing and Urban Development. "Model Manufactured Home Installation Standards."