Different Mortgage Loan Types 

Are you getting ready to dive into your first home purchase? There are many loan options available to homebuyers, and this can be overwhelming!

Learn about the most common ones and the differences between them.

 

Popular Types of Loans

 

1. Conventional / Fixed Rate Mortgage:

Conventional fixed rate loans are a safe bet because of their consistency — the monthly payments won’t change over the life of your loan. This is the standard, most common mortgage type.

Fixed-rate mortgage loans come in 5, 10, 15, 20, 30, 40, and even 50-year terms, all of which are completely amortized.

2. Interest-Only Mortgage:

Calling a mortgage loan type an "interest-only mortgage" is a bit misleading because these loans are not really interest-only in the way that the name might imply. 

Instead, interest-only loans contain an option to make an interest-only payment. The option is available only for a certain period of time. However, some junior mortgages are indeed interest-only and require a balloon payment, consisting of the original loan balance at maturity.

3. Adjustable Rate Mortgage (ARM):

There are many different types of ARM mortgages. The foundational idea is that their interest rate changes over time throughout the life of the loan. The rate changes reflect changes in the economy and the cost of borrowing money.

A common ARM is called the 5/1 loan. With this type of loan, the interest rate stays the same for the first five years and then is free to change for the remaining 25 years.

 

Specialty Mortgage Loan Types

 

4. FHA Loans:

FHA Loans are guaranteed by the Federal Housing Administration. FHA loans offer more relaxed qualifying restrictions such as a lower credit score, smaller reserve funds, and a higher debt-to-income ratio.

With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, these loans are popular among first-time home buyers who have little savings or have credit challenges. 

5. VA Loans:

The VA loan is a government loan available to veterans who have served in the U.S. Armed Services and, in certain cases, to spouses of deceased veterans.

They don’t require a downpayment and are guaranteed by the Department of Veteran Affairs. They do, however, have to pay an upfront funding fee to help offset what the loans cost U.S. taxpayers. The fee can be as much as 3.6% of the loan amount.

 

Extra Types of Loans 

 

7. Balloon:

On a balloon mortgage, you pay interest only for a certain period of time — five years for example — and then the total principal amount is due after this initial period.

8. Jumbo:

Jumbo refers to a mortgage that’s too big for the federal government to purchase or guarantee. Currently, the limit is about $700,000. This means that with a jumbo loan, the borrower wouldn’t get the lowest interest rates available on smaller loans.

 

Bottom Line 

Now you know the types of mortgages you're most likely to encounter when buying a home! Don’t stress, and communicate with your loan officer throughout the process. Ask questions and be transparent about your needs. After all, your loan officer serves as your trusted advisor!