Understanding Loans: 10 Different Types of Mortgages

1. Conventional Loans

A conventional loan is any mortgage not backed by the federal government. They usually require a higher credit score (typically 620) and detailed documentation of income, employment, and assets. Borrowers with less than a 20% down payment usually pay private mortgage insurance (PMI).

Key Features

• Minimum credit score: 620

• Requires detailed income, employment, credit, and asset documentation

• PMI required if down payment is less than 20%

Pros

• Can be used for primary homes or investment properties

• PMI can be removed after reaching 20% equity

Cons

• Minimum 3% down payment required

• PMI required for down payments below 20%

Ideal for: Borrowers with steady income, strong credit, and at least 3% down.

2. Fixed-Rate Mortgages

A fixed-rate mortgage keeps the same interest rate for the entire loan term, offering predictable monthly payments. Common terms are 15 or 30 years.

Key Features

• Fixed interest rate for the life of the loan

• Repayment terms usually in five-year increments, some lenders offer custom terms

Pros

• Predictable principal and interest payments

• Easier budgeting

Cons

• Longer terms can result in paying more interest overall

• Initial interest rates higher than adjustable-rate mortgages

Ideal for: Borrowers who want stable, predictable payments.

3. Adjustable-Rate Mortgages (ARMs)

ARMs have variable interest rates that change after an initial fixed period. A common 5/1 ARM is fixed for five years, then adjusts annually. They typically start with lower rates than fixed-rate loans.

Key Features

• Variable interest rate that adjusts based on market conditions

• Lower initial rate than fixed-rate mortgages

• Lifetime adjustment cap (commonly 5%)

Pros

• Lower initial monthly payments

• Potentially lower interest if selling or refinancing before adjustments

Cons

• Payments can increase unpredictably

• Risky if home value drops or market rates rise

Ideal for: Borrowers planning to move or refinance before the adjustable period begins.

4. High-Balance Loans

High-balance loans are conventional loans exceeding standard conforming limits, designed for high-cost areas. The 2022 single-family high-balance limit is $970,800.

Key Features

• Follows Fannie Mae and Freddie Mac guidelines

• Available in designated high-cost areas

Pros

• Makes conventional loans possible in expensive markets

• Lower interest and down payments than jumbo loans

Cons

• May have higher interest than standard conventional loans

• Only available in certain locations

Ideal for: Borrowers needing a conventional loan in a high-cost market.

5. Jumbo Loans

Jumbo loans exceed conforming loan limits and are often used for luxury homes. They require higher credit scores (typically 680–700+) and larger down payments (20%+).

Key Features

• Larger loan amounts than conforming loans

• Stricter credit and down payment requirements

Pros

• Can finance expensive homes or properties

Cons

• High down payment required

• Not eligible for conventional loan benefits

Ideal for: Borrowers needing mortgages above conforming limits.

6. FHA Loans

FHA loans are backed by the Federal Housing Administration and cater to borrowers with lower credit scores or limited savings. Minimum credit score: 580 with 3.5% down.

Key Features

• Low credit score and down payment requirements

• Mortgage insurance premiums required

• Can finance up to four-unit properties as a primary residence

Pros

• Easier to qualify than conventional loans

• Available for first-time and repeat buyers

Cons

• Lower loan limits than conventional loans

• Mortgage insurance required

Ideal for: Borrowers with lower credit scores and limited savings.

7. VA Loans

VA loans are available to military members, veterans, and eligible spouses. Most don’t require a down payment.

Key Features

• No down payment in most cases

• Competitive interest rates

• VA-backed

Pros

• No income or loan limits

• No mortgage insurance required

Cons

• VA funding fee required

• Must use VA-approved appraisers/builders for new construction

Ideal for: Eligible military borrowers seeking a no-down-payment option.

8. USDA Loans

USDA loans help low- to moderate-income borrowers purchase homes in rural areas. No down payment or mortgage insurance is required, but income limits apply.

Key Features

• Available in USDA-designated rural areas

• Zero down payment

Pros

• Can finance various property types

• No mortgage insurance

Cons

• Must live in the home

• Annual guarantee fee required

Ideal for: Borrowers with modest income looking for zero-down financing.

9. Home Equity Lines of Credit (HELOCs)

A second mortgage lets you borrow against your home equity. HELOCs are revolving credit lines; home equity loans are lump-sum with fixed payments.

Key Features

• Borrow against home equity for any purpose

• Available as lump-sum or revolving credit

Pros

• Flexible use of funds

Cons

• Higher rates and stricter qualification than first mortgages

Ideal for: Borrowers using home equity for financial goals.

10. Reverse Mortgages

Reverse mortgages are for homeowners 62+ and allow them to receive payments from their home’s equity instead of making payments. The most common is the FHA-insured Home Equity Conversion Mortgage (HECM).

Key Features

• No payments required until the home is sold or borrower moves out

• Must maintain home and pay taxes/insurance

• Require at least 50% home equity

Pros

• Supplemental retirement income

• No monthly payment unless moving

Cons

• High upfront and ongoing costs

• Risk of foreclosure if home not maintained

• Heirs may not inherit an underwater home

Ideal for: Older homeowners with substantial equity needing retirement income.