Mortgage
Buying a Home
Understanding Loans: 10 Different Types of Mortgages
1. Conventional Loans
A conventional loan is any mortgage that’s not backed by the federal government. Conventional loans have higher minimum credit score requirements than other loan types, typically 620 and are harder to qualify for than government – backed mortgages. Borrowers who make less than a 20% down payment are typically required to pay private mortgage insurance (PMI) on this type of mortgage loan.
Key Features:
- Require a minimum 620 credit score.
- Require borrowers to provide in-depth income, employment, credit, asset and debt documentation for approval.
- Typically require Private Mortgage Insurance for down payments less than 20%
| Pros | Cons |
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Can be used for a wide variety of purchases, from a primary home to an investment property |
Must have at least a 3% down payment |
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You can get rid of PMI once you reach 20% equity |
You must pay PMI if you put down less than 20% |
Ideal for: Borrowers with a steady income and employment history, strong credit and at least a 3% down payment.
2. Fixed - Rate Mortgages
A fixed-rate mortgage is exactly what it sounds like: a home loan with a mortgage interest rate that stays the same for the entire loan term. The rate will stay the same, unless you refinance your mortgage.
Two common fixed-rate options are 15- and 30-year mortgages. Unlike some other types of mortgage loans that have variable rates, fixed-rate loans offer more stability and predictability to help you better budget for housing costs.
Key features:
- Include a fixed interest rate that won’t change over the life of the loan.
- Usually come in repayment terms of five-year increments, though some lenders let you pick from custom loan terms.
| Pros | Cons |
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Your monthly principal and interest payments won’t change because your interest rate won’t change |
Longer term lengths mean paying more interest overall |
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Interest rates are initially higher than adjustable-rate mortgages (ARMs) |
Ideal for: Borrowers who prefer stable principal and interest payments on their mortgage.
3. Adjustable - Rate Mortgages
An adjustable-rate-mortgage (ARM) is a type of mortgage loan that has a variable interest rate. Instead of staying fixed, it fluctuates over the repayment term. One popular ARM option is the 5/1 ARM, which is considered a hybrid mortgage because it has both a fixed-rate period and a period where the rate adjusts on a recurring basis.
With a 5/1 ARM, the interest rate is fixed for an initial period of five years and then adjusts annually for the remainder of the loan term. ARMs usually start off with lower rates than fixed-rate loans but can go as high as five percentage points above the fixed rate when they adjust for the first time.
Key features:
- Include a variable rate, which can change based on market conditions.
- Typically begin with a mortgage rate that is lower than fixed-rate loans.
- Come with a lifetime adjustment cap, which often means the variable rate can’t jump by more than five percentage points over the life of the loan.
| Pros | Cons |
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Monthly payments will be more affordable than a fixed-rate loan during the initial period |
A riskier loan option because you don’t know exactly what payment amounts you're signing up for |
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Can help you pay significantly less in interest over the life of the loan |
If you have a plan to refinance or sell before the loan adjusts, you may be in trouble if the home’s value falls or the market takes a downturn |
Ideal for: Borrowers who plan to move or refinance before the fixed-rate period on their loan ends.
4. High - Balance Loans
A high-balance loan is another type of conventional loan. In a nutshell, it’s a loan with a balance that exceeds the standard conforming loan limit, but it is still considered to be conforming because it stays within the loan limit that the Federal Housing Finance Agency (FHFA) has set for localities it recognizes as high-cost areas.
The high-balance loan limit for single-family homes in 2022 is $970,800, which is 150% of the standard loan limit mentioned above.
Key features:
- Adhere to Fannie Mae and Freddie Mac guidelines.
- Allow borrowers to borrow above standard loan limits in high-cost counties.
| Pros | Cons |
|---|---|
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Puts conforming loans in reach for borrowers buying in especially expensive markets |
May have higher interest rates than a typical conventional loan |
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Often offers lower interest rates and down payment requirements than jumbo loans |
Under Fannie Mae guidelines, every co-borrower on a loan has to have a credit score |
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You won’t be able to use Fannie Mae’s 3% down-payment loan options |
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Can only be used in designated locations |
Ideal for: Borrowers who want a conventional loan in an area where home prices are higher than average.
5. Jumbo Loans
A jumbo mortage is a larger conventional loan, typically used to buy a luxury home. Jumbo loan amounts exceed all conforming loan limits and often require a large down payment of at least 20%.
Jumbo loans differ from high-balance conforming loans in that jumbo loans don’t conform to the guidelines put in place by Fannie Mae and Freddie Mac. You may also qualify to borrow more with a jumbo loan than a high-balance loan — perhaps $1 million or more — if you’re eligible.
In recent years, jumbo mortgage rates haven’t been significantly higher or lower on average when compared with conforming conventional loans.
Key features:
- Allow for larger loan amounts, even if they exceed the limits for conforming loans.
- Have stricter credit score and down payment requirements than conforming loans.
- Require a large down payment.
| Pros | Cons |
|---|---|
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Can be used for a wide range of property types |
A larger down payment is required if you want to use it for a second home or investment property |
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Interest rates are similar to conforming conventional loan rates |
Require high credit scores (typically 680 to 700 and above) |
Ideal for: Borrowers who need a mortgage that exceeds conforming loan limits.
6. FHA Loans
The Federal Housing Administration (FHA) backs these types of mortgage loans, which cater to borrowers with credit blemishes and limited down payment funds. You can qualify for an FHA Loan with a 580-credit score and a minimum 3.5% down payment. If your score is between 500 and 579, you’ll need a 10% down payment. In 2022, the FHA loan limit in most U.S. counties is set at $420,680 for single-family homes. In high-cost areas, the FHA loan limit is $970,800.
FHA loans have mandatory mortgage insurance premiums. If you put down less than 10%, you’ll pay FHA mortgage insurance for the life of your loan — unless you refinance into a conventional loan after building at least 20% equity. Otherwise, you’ll only pay it for 11 years if you put down at least 10%.
Key features:
- Require just a 580-credit score to qualify for the minimum down payment amount.
- Include a mortgage insurance premium requirement for most borrowers.
- Come with the ability to buy a multi-unit property with up to four units as a primary residence with just 3.5% down (and at least a 580 score).
| Pros | Cons |
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Available to first-time and repeat buyers |
You must live in the property, even if you rent out other units |
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No income limits |
Loan limits are lower than what some conventional loans can offer |
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Easier to qualify for than conventional loans |
You'll pay mortgage insurance premiums |
Ideal for: Borrowers with lower credit scores and access to minimal savings for a down payment.
7. VA Loans
Military servicemembers, veterans and eligible spouses may qualify for a loan backed by the U.S. Department of Veterans Affairs (VA).
In the vast majority of cases, VA Loans don’t require a down payment. While the VA doesn’t have a minimum credit score requirement, VA lenders may expect to see a minimum 620 credit score. Additionally, the VA no longer has loan limits for borrowers who have never used their VA loan benefits or have paid their existing VA loans in full.
Key features:
- Provide opportunities for members of the military, veterans and eligible spouses to buy a home.
- Don’t require a down payment in most cases.
| Pros | Cons |
|---|---|
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No income or loan limits |
Must pay a VA funding fee |
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No mortgage insurance requirement |
Must use VA-approved appraisers and, if building a custom home, VA-approved builders |
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Competitive interest rates |
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Offers loans for buying or building a home, renovating or buying a manufactured home |
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Ideal for: Qualified military borrowers who need a no-down-payment loan option.
8. USDA Loans
The U.S. Department of Agriculture (USDA) insures USDA Loans provided to low- and moderate-income buyers looking to purchase homes in designated rural areas. No down payment or mortgage insurance is required for these types of home loans, but there are income limitations.
Key features:
- Cater to borrowers interested in buying homes in USDA-designated rural areas.
- Don’t require a down payment or mortgage insurance.
| Pros | Cons |
|---|---|
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Available for a wide range of home types ranging from single-family homes to condos, modular and manufactured homes and newly constructed homes |
Some USDA loans have limitations on how big the property can be and what amenities it can have |
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No down payment |
The home must be your primary residence |
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No mortgage insurance |
Must pay an annual guarantee fee |
Ideal for: Borrowers with a modest income looking for a 0%-down-payment loan.
9. Home Equity Lines of Credit (HELOCs)
A second mortgage is a different type of mortgage loan that allows you to borrow against the equity you’ve built in your home over time. Similar to a first mortgage, which is the loan you use to buy a home, a second mortgage is secured by your home. However, a second mortgage takes a subordinate position to a first mortgage, which means it’s repaid after a first mortgage in a foreclosure sale.
Both home equity loans and home equity lines of credit (HELOCs) are types of second mortgages. A home equity loan is a lump-sum amount. It typically comes with a fixed interest rate and is repaid in fixed installments over a set term. A HELOC is a revolving credit line with a variable rate that works similarly to a credit card. The funds can be used, repaid and reused as long as access to the credit line is open.
Key features:
- Allow borrowers to tap their home equity for any purpose, including debt consolidation or home improvement.
- Include lump-sum and credit line options.
- Use a borrower’s home as collateral, just like a first mortgage.
| Pros | Cons |
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Can be used to purchase or refinance a home |
Rates and qualification requirements are more stringent than for first mortgages |
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Can be used by homeowners without a first mortgage in some cases |
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Ideal for: Borrowers who want to use their existing equity to fund other financial goals.
10. Reverse Mortgages
Homeowners age 62 and older may qualify for a reverse mortgage, a mortgage loan type that differs from a traditional “forward” home loan. Instead of you making payments to your lender, your reverse mortgage lender makes payments to you — from your available equity — in a lump sum or monthly.
The home equity conversion mortgage (HECM) is the most common type of reverse mortgage. It’s insured by the FHA and comes with several upfront and ongoing costs. HECMs, like FHA loans, also have loan limits. For 2022, the maximum loan limit for an HECM is $970,800. You have many options for repaying a reverse mortgage, including selling your home or refinancing to take out a new, forward mortgage to cover what’s owed.
Key features:
- Don’t require payments until the home is sold or the borrower (or eligible surviving non-borrowing spouse) moves out or dies.
- Require borrowers to have at least 50% equity in their home.
- Require borrowers (or surviving spouses) to continue to maintain the home, live in it as a primary residence and pay property taxes and homeowners insurance.
| Pros | Cons |
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No income or DTI ratio requirements |
For married couples, the youngest spouse’s age determines qualification |
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No monthly payments unless you move out of the house |
Failure to properly maintain the house or pay property taxes or home insurance can lead to foreclosure |
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Income from the reverse mortgage payouts won’t be taxed |
Come with significant costs and fees including:
Lender fees (up to $6,000)
An upfront mortgage insurance premium (2% of your home’s value)
Annual mortgage insurance premiums (0.5% of the loan amount) |
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Your heirs won’t inherit an underwater home |
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You can pay off a first mortgage with the reverse mortgage |
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You can use the funds to purchase a home |
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Ideal for: Older homeowners (62 and older) with a substantial amount of equity who need supplemental retirement income.
520-301-3651
