Buying a home? It's time to learn about the different types of mortgages

A mortgage is a type of loan used to purchase real estate. Although business owners can get mortgages for commercial properties, it's more common for consumers to use mortgage funds to buy homes.

The type of mortgage you have can affect your monthly payment, interest costs, and overall financial flexibility, so it's important to research your options carefully.

With so many consumers wondering if interest rates are going to drop, now is the perfect time to learn more about the types of mortgages available. On the following slides, you'll find a list of common mortgage types that will help you understand their features and decide which one is the right fit for your needs.

Fixed-rate mortgages

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A fixed-rate mortgage has the same interest rate for the life of the loan, typically 15 to 30 years.

• Pros: With a fixed rate, you never have to worry about your payment increasing suddenly. You'll pay the same amount every month, making it easier to budget for your mortgage payments.
• Cons: The interest rate on a fixed-rate loan is usually higher than the initial interest rate on an adjustable-rate loan.
• Ideal for: Fixed-rate mortgages are ideal for buyers who value stability or plan to stay in their homes for a long time.

Adjustable-rate mortgages (ARMs)

An ARM has an interest rate that can change during the loan term. For example, a 5/1 ARM has a fixed rate for the first five years, and then the rate adjusts annually every year thereafter.

• Pros: ARMs typically have lower initial interest rates than fixed-rate mortgages. It's also possible to save money if interest rates remain low.
• Cons: Changing rates make it more difficult to anticipate your monthly payment. You might have a monthly payment of $1,500 one year and $2,000 the next year, depending on how rates move. If rates increase, you'll pay more interest over the life of the loan.
• Ideal for: Consider getting an ARM if you plan to sell your home or refinance your loan before the rate adjusts.

FHA (Federal Housing Administration) loans

An FHA loan is a government-backed mortgage with flexible credit requirements. This type of mortgage also requires a smaller down payment than a conventional loan.

• Pros: Thanks to the flexible credit requirements, it's easier to qualify for an FHA loan than most other types of mortgages. The FHA also requires down payments as low as 3.5% of the home's purchase price.
• Cons: The Federal Housing Administration requires all borrowers to purchase mortgage insurance (insurance that protects the lender if the borrower defaults on the loan). This increases the monthly mortgage payment and drives up the total cost of homeownership.
• Ideal for: FHA loans are ideal for first-time buyers and buyers with low credit scores who can't meet the requirements for other types of loans.

VA (Veterans Affairs) loans

VA loans are mortgages backed by the Department of Veterans Affairs. They require no down payment and no private mortgage insurance, making it easier for veterans to afford homeownership.

• Pros: VA loans have favorable terms, including no down payment and no PMI. The Department of Veterans Affairs also has multiple loan types, such as purchase loans and refinance loans, to suit varying needs.
• Cons: VA loans are only available to qualifying veterans, active-duty service members, and certain spouses.
• Ideal for: Consider applying for a VA loan if you're an eligible veteran or member of the military.

USDA (U.S. Department of Agriculture) loans

The U.S. Department of Agriculture guarantees home loans for rural and suburban homebuyers who meet strict income and location criteria.

• Pros: USDA loans require no down payment and come with low interest rates, making them more accessible to buyers who can't qualify for conventional mortgages. These loans also have flexible credit requirements.
• Cons: The USDA only guarantees loans for homes in eligible rural areas, so you can't use this type of mortgage for a home in just any city. USDA home loans also have income limits, so not everyone qualifies.
• Ideal for: You might benefit from a USDA loan if you're planning to buy a home in an eligible rural area and have a household income that falls below the program limit.

Jumbo loans

A jumbo mortgage is a home loan that exceeds the conforming limits (the maximum loan amounts) set by Fannie Mae/Freddie Mac.

• Pros: Jumbo loans make it easier to purchase luxury homes and homes in cities with high costs of living. High costs of living often translate into high home prices, making it difficult for some buyers to qualify for conventional loans.
• Cons: Lenders have stricter credit requirements to account for the increased risk associated with allowing homebuyers to borrow larger amounts of money. It's also common for lenders to charge higher interest rates and require higher down payments on homes purchased with jumbo loans.
• Ideal for: This type of loan is ideal if you need a loan that exceeds the conforming limits set by Fannie Mae and Freddie Mac.