What Are the Different Mortgage Loan Types?

There are four main types of mortgage loans: fixed-rate, adjustable-rate, interest-only, and jumbo. Learn more about each loan type and see which one is right for you.

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Introduction

There are many different types of mortgage loan products available on the market today. In this guide, we’ll outline some of the most popular types of home loans and help you decide which one is right for you.

The two main categories of mortgage loans are fixed-rate and adjustable-rate mortgages (ARMs). Within these categories, there are different types of loans available, each with its own set of pros and cons.

Fixed-Rate Mortgages:
A fixed-rate mortgage is just what it sounds like – the interest rate on your loan is fixed for the life of the loan. This means that your monthly payments will stay the same, no matter what happens to interest rates in the market.

The main benefit of a fixed-rate mortgage is that it gives you predictability and peace of mind when it comes to your monthly payments. You’ll always know how much you need to budget for your housing costs, and you won’t have to worry about fluctuations in the market affecting your payment amount.

The downside of a fixed-rate mortgage is that you may end up paying more interest over the life of the loan than you would with an adjustable-rate mortgage. If interest rates rise in the future, you’ll be stuck making higher payments even if rates eventually fall back down.

Adjustable-Rate Mortgages:
An adjustable-rate mortgage (ARM) is a type of home loan where the interest rate is not fixed – it can adjust periodically over time. The most common type of ARM is a “5/1” ARM: this means that for five years, your interest rate will be fixed; after those five years are up, your rate will reset once per year and can fluctuate up or down depending on market conditions.

Fixed-rate mortgage loans

A fixed-rate mortgage loan has an interest rate that remains the same for the entire term of the loan. Your monthly principal and interest payment will remain the same every month, regardless of changes in market interest rates.

Adjustable-rate mortgage loans
An adjustable-rate mortgage loan has an interest rate that may change over time. The monthly principal and interest payment may go up or down as market rates change.

Jumbo mortgage loans
A jumbo mortgage loan is a loan that exceeds the conventional loan limits set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and securitize mortgages.

Government-insured mortgage loans
Government-insured mortgage loans are backed by either the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). These loans have more lenient credit requirements and lower down payment requirements than conventional loans.

Adjustable-rate mortgage loans

An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly. However, some ARMs may have initial rates that are valid for more than five years before resetting.

Government-insured mortgage loans

The three government-backed loan types available in the U.S. mortgage market are FHA loans, VA loans and USDA loans. Each one of these loan types insures mortgages against default to help protect lenders, but each type of loan has different benefits, requirements and restrictions that borrowers should be aware of when they’re considering a home purchase.

FHA Loan: This loan type is insured by the Federal Housing Administration and is available to first-time home buyers with less-than-perfect credit or limited funds for a down payment. Borrowers can qualify for an FHA loan with a credit score as low as 500, but they will need to put down at least 10 percent of the purchase price as a down payment.

VA Loan: A VA loan is a mortgage loan that is backed by the U.S. Department of Veterans Affairs and is available to eligible veterans, active-duty service members and their spouses. Borrowers can qualify for a VA loan with a credit score as low as 620 and they are not required to make a down payment on the home if they are using their VA eligibility.

USDA Loan: The U.S. Department of Agriculture guarantees USDA loans, which are also sometimes called Rural Development loans, for low- and moderate-income borrowers who are looking to buy homes in eligible rural areas of the country. Borrowers can qualify for a USDA loan with a credit score as low as 640 and they do not need to make a down payment on the home if they meet certain income requirements.

Jumbo mortgage loans

Jumbo mortgage loans are home loans that exceed the limit for conforming loans, which are loans that follow the guidelines set by Fannie Mae and Freddie Mac. In most parts of the country, the limit for conforming loans is $484,350, but in high-cost areas it can be as high as $726,525. Jumbo mortgages can be fixed-rate or adjustable-rate loans.

Conclusion

There are many different types of mortgage loans available to home buyers today. In this article, we will discuss the most common types of mortgage loans and help you decide which one may be right for you.