Understanding 5 Types of Mortgage Loans for Homebuyers

Many prospective homebuyers in today's real estate market need a mortgage to buy a home, but this type of loan isn't one-size-fits-all. To help you find the right home loan for your needs, here is our guide to the five main types of mortgages. Some of the key takeaways of this article are as follows:Mortgage loans

  • The main types of mortgages are conventional loans, government-backed loans, jumbo loans, fixed-rate loans, and adjustable-rate loans.
  • There are many different types of mortgages for various purposes, such as building or renovating a home or investing in property.
  • The right mortgage for you depends upon the strength of your credit score and finances along with your goals.

Continue to read to find out the 5 types of mortgage loans for homebuyers and the key to understanding them.

Types of Home Loans

There are 5 main kinds of mortgages, each with their features and benefits.

  1. Conventional Loan: Best for borrowers with good credit scores.
  2. Jumbo Loan: Best for borrowers with good credit looking to buy a more expensive home.
  3. Government-backed Loan: Best for borrowers with lower credit scores and minimal cash for a down payment.
  4. Fixed-Rate Mortgage: Best for borrowers who would prefer a predictable, set monthly payment for the duration of the loan.
  5. Adjustable-rate Mortgage: Best for borrowers who aren't planning to stay in the home for an extended period, prefer lower payments in the short term, or are comfortable with having to pay more in the future out of pocket.

A Deeper Look

1. Conventional Loan

The most popular type of mortgage loan comes in two parts: conforming and non-conforming.

  • Conforming Loans: A conforming loan "conforms" to a set of FHFA standards, including guidelines around credit, debt, and loan size.
  • Non-Conforming Loans: These loans do not meet one or more of FHFA's standards. One common type of non-conforming loan is a jumbo loan, a mortgage in an amount that exceeds the conforming loan limit.

Pros 

  • Available from the majority of lenders.
  • Can be put toward financing primary residences, second or vacation homes, and investment or rental properties.
  • Can put down 3% for a conforming, fixed-rate loan.

Cons 

  • Need a credit score of 620+ to qualify.
  • Lower DTI ratio threshold.
  • Need to pay PMI premiums if putting down 20% down.

2. Jumbo Loan

Jumbo mortgages are home loans in an amount that surpasses FHFA's conforming loan limits.

Pros 

  • Can finance expensive homes.
  • Competitive interest rates on par with those on conforming loans.
  • The only option is in areas with higher home values.

Cons

  • Not available with every lender.
  • High credit score requirement, usually 700+.
  • High downpayment requirement, often 10% to 20%.

I reached out to Debbie Drummond  with Luxury Home Pro for her advice on jumbo loans:

"Jumbo loans can be a great way for move-up buyers to enter the luxury home market. They will require 20% down payments and the borrower must have good credit scores (750+). The interest rates are slightly higher on jumbo loans but if it gets the buyer into their new luxury home before prices go up even more, the higher interest rate could well be worth it. For example, today's luxury home that's priced at $1.5M today, could be closer to $2M a year from now. The money the buyer saves on the price will be more than the extra interest they will pay for a jumbo loan."

3. Government-Backed Loans

The U.S. government is not a mortgage lender, but it plays a role in making homeownership accessible to more Americans by lacking three main types of mortgages:

  • FHA Loans: Insured by the FHA, FHA loans can be had with a credit score as low as 580 and a 3.5 percent down payment, or a score as low as 500 with 10% down. FHA loans require paid mortgage insurance premiums, adding to total costs.
  • VA Loans: Guaranteed by the U.S. Department of Veterans Affairs (VA), VA loans are for eligible members of the U.S. military, active or not, and surviving spouses. There is no minimum downpayment, mortgage insurance, or credit score requirement, but a funding fee range will be paid from 1.25% to 3.3% at closing.
  • USDA Loans: Guaranteed by the U.S. Department of Agriculture (USDA) loans help moderate-to-low-income borrowers buy homes in rural, USDA-eligible areas.

Pros 

  • Very flexible credit and down payment guidelines.
  • Helps borrowers who wouldn't otherwise qualify.

Cons 

  • Additional costs for FHA mortgage insurance, VA funding fee, and USDA guarantee fees.
  • Limited to borrowers buying a home priced within FHA loan limits or in a rural area, or service members.

4. Fixed-Rate Mortgage

Fixed-rate mortgages maintain the same interest rate over the life of your loan, which means monthly mortgage payments remain the same. Fixed loans typically come in terms of 15 years or 30 years, though lenders offer flexible term lengths.

Pros

  • Fixed monthly mortgage payment.
  • Easier to budget for.

Cons

  • Interest rates are higher than introductory rates on adjustable-rate loans.
  • Need to refinance to get a lower rate.

5. Adjustable-rate Mortgage

Adjustable-rate Mortgages come with interest rates that change over time, typically with an ARM, there is a lower, fixed introductory rate for a set period. After this period, the rate changes, either up or down. When your rate goes up, your monthly mortgage payment does as well, and vice versa.

Pros 

  • Lower introductory rates.
  • Can pay less over time if prevailing interest rates fall.

Cons 

  • Ongoing risks of higher monthly payments.
  • Tough to plan your budget as rates change.

How to Choose the Right Type of Mortgage Loan for You

Depending on your credit and finances, more than one type of mortgage could make sense for you. You may be able to strike some loan types off the list immediately. As you think about which type of mortgage to get, consider the following:

  • Your Credit Score: Which loan types do you qualify for from a credit standpoint?
  • Your Anticipated Down Payment: Do you need a low-or-no-down payment loan or payment assistance?
  • Your Debt and Income: After debt payments, is your monthly income sufficient to cover a mortgage?
  • Your Appetite for Risk: Do you need a stable monthly payment?
  • Your Future Plans: Do you plan to move in the short term?

The Bottom Line

Once all of these questions have been thoroughly weighed, compare mortgage lenders and talk to a loan office, as they can help you pinpoint the best fit. Let the Homeowner Experience Real Estate agents help you find your next dream home in Blossom Valley today, all without making any mortgage mistakes along the way.

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