Types of Mortgage Loans: A Quick Comparison
If you’re shopping for a new home, figuring out financing options is likely on your to-do list. The earlier you learn about your mortgage choices, the more time you have to prepare financially for closing. While this is good news, it doesn’t make reviewing home loan details feel less intimidating. A vast array of possibilities, lengthy explanations, and confusing terms can make it seem like you’ve enrolled in a college-level finance class against your will.
But, understanding the basics of home loan financing is necessary, especially if you intend to stay within a home buying budget. Fortunately, learning about each program is relatively simple when you focus on their distinct qualities. From there, you can eliminate loan options that aren’t a fit for your finances.
Use this home loan quick reference guide to get started.
Is a fixed-rate or adjustable-rate mortgage better?
Fixed-rate and adjustable-rate mortgages (ARM) differ on the interest rate and terms associated with the loan. A fixed-rate loan comes with a set interest rate for the life of the loan. ARMs generally come with a fixed rate for the first three, five, seven, or ten years of the loan, with the rate changing after that according to market conditions.
Standard fixed-rate loans are available with varying repayment terms. The most common are 30-year and 15-year fixed.
- 30-year fixed: Borrowers are allowed up to 30 years to pay the loan in full. Since you’re repaying over a more extended period, the monthly payments are typically lower than shorter-term loans.
- 15-year fixed: You can usually save on interest charges with a 15-year fixed-rate mortgage, but payments will be higher. Not only can lenders offer a lower rate, but you’ll pay less over time because you’re paying the loan off faster.
The better choice is the one that aligns with your current budget and future financial goals.
What is a conventional vs. government mortgage?
There are two primary types of mortgages to pick from: a conventional mortgage and a government mortgage. When you think of borrowing money to purchase your home, the conventional mortgage probably comes to mind. The federal government doesn’t insure these.
While the U.S. government isn’t a mortgage lender, it offers programs to make buying a home easier. For example, buyers with less money saved or who have had some problems with their credit history could benefit from a Federal Housing Administration (FHA) loan because it requires a lower down payment and generally has more flexible underwriting criteria.
What are the different types of conventional loans?
For a conventional mortgage, you generally need to save for a larger down payment. Putting 5% to 20% down is standard, though you’ll pay private mortgage insurance (PMI) if your down payment is less than 20%.
Conventional loans fall into two main categories:
A conforming loan complies with the funding criteria set by Fannie Mae or Freddie Mac, the two government agencies that drive the mortgage market. If the amount of money you want to borrower to purchase your home is more than the conforming loan limit, which is $510,400 as of 2020, you’ll likely need a jumbo loan. They are primarily found in high cost-of-living areas and can require additional documentation to qualify.
If the loan amount doesn’t meet government guidelines, it’s considered a non-conforming type of loan. The most common non-conforming loan is a jumbo mortgage.
What are the three types of government mortgages?
The government offers mortgage programs to make buying a house easier for those who qualify. The three government agencies that insure loans are the Federal Housing Administration (FHA), the Department of Agriculture (USDA), and the Department of Veterans Affairs (VA).
- FHA loan
FHA loans are popular since you need little money down and can qualify even if you don’t have a strong credit history. If a large down payment is out of reach, an FHA loan can help. Often, you can get a mortgage with as little as 3.5% down.
- VA loan
For qualified members of the military, including veterans and their spouses, a VA loan can help you get into your dream home. Lenders allow you to finance up to 100% of the home’s value. That means there’s no down payment required with most VA loans.
- USDA loan
If you live in a rural area, the government has a specific home loan program for you. People who live in rural areas may have lower incomes, making it difficult to save for a down payment or qualify for a conventional loan. There are some eligibility rules, but you could get a USDA loan with little to no money down.
Unless you’re paying cash, you’ll need a mortgage loan to buy a house. Considering you’ll likely be paying on your home for a long time, securing a home loan that meets your needs is crucial. Whether you’re a first-time or experienced homebuyer, let us help you decide on the best mortgage loan for your situation. Speak with a friendly Mortgage Expert today via email or by calling (877) 773-6605.