Life situations differ wildly, so buying a home will look a little different for each person and family. As such, mortgage loans come in numerous types to accommodate many different scenarios.
The most common type of mortgage is a fixed-rate loan. Fixed-rate mortgages have an interest rate that remains consistent throughout the life of the loan, meaning monthly payments are predictable.
When to choose a fixed-rate loan
These mortgages are fairly standard, which means many home buyers opt for them. They tend to be best for buyers with good credit who buy when rates are low since they can lock in a solid rate early on.
It’s worth noting that you’ll want a decent amount saved up to make a sizeable down payment (ideally 20%). This is true for most loans, but with fixed-rate mortgages, it helps keep rates and monthly payments low from the beginning.
ARM (Adjustable-Rate Mortgage)
The opposite of a fixed-rate loan is an adjustable-rate mortgage or ARM. With an ARM, your interest rate—and thus your monthly payments—will change from time to time as market rates shift.
Some ARMs will allow you to lock in a rate for a few years before they start fluctuating, making them a little more stable.
When to choose an ARM
ARM’s usually have better starting rates than fixed-rate loans, so they’re sometimes preferred when market rates are a little high. Over time, as market rates drop (or as they build credit), buyers could refinance to a fixed-rate to lock in lower interest.
Some home buyers want to buy big, but that means borrowing more than is typically covered by loan-servicing agencies such as Fannie Mae or Freddie Mac. These loans are called jumbo loans, and they can help you get the house you want—if you can afford it.
When to choose a jumbo mortgage
Jumbo mortgages are best for buyers with high income, superb credit, and significant amounts saved up for a down payment. The more you can pay down and the better your credit, the lower your considerable monthly payments will be (as will your chances of getting approved).
The U.S. government insures mortgage loans for buyers in several different life situations. The first example of this is an FHA loan.
An FHA loan is insured by the Federal Housing Administration, and it’s designed for buyers with lower levels of income.
When to choose an FHA loan
FHA loans are popular among first-time homebuyers, since they have lower credit and down payment requirements. If your credit is at least 580, you only have to make a 3.5% down payment, making it easier to afford the upfront costs of a home. Buyers with slightly lower credit can still qualify with a down payment of 10%.
The US Department of Veteran Affairs insures VA loans, which are intended for veterans, active-duty personnel, and their spouses. VA loans require no down payment, and they have minimal rates and costs. These loans carry a funding fee, but it may be waived in some cases.
When to choose a VA loan
To qualify for a VA loan, you must be an active-duty member of the military, a veteran, or the spouse of a veteran/active-duty military. Featuring low rates, no down payment requirement, and very few to no credit requirements, VA loans are typically the best option for anyone who is or has been in the military.
The US Department of Agriculture guarantees USDA loans, which are intended for moderate-income families looking to live in rural areas. USDA loans have no down payment requirements, and often have lower interest than typical market rates, but they do have some requirements.
When to choose a USDA loan
To qualify for a USDA loan, you don’t have to buy a farm or anything. You’ll simply need to meet these requirements:
- Move into a home in a qualifying USDA-eligible area
- Have income below a certain threshold (depends on the area)
- Buy a home with a value below a given threshold (varies by area)
It’s also best to have decent credit (typically 640) to streamline the process.
Other Types Of Mortgage Loans
Some other less common types of mortgages include the following:
A balloon loan has minimal monthly payments, since most of those payments go toward interest alone. After a short period of time (usually five to seven years), the loan balance comes due. This loan type is best for reliable buyers who intend to sell their homes after a few years.
FHA Section 203(k)
An FHA Section 203(k) loan is like an FHA loan, except that you can borrow extra to cover renovations on a home. Those improvements must cost more than $5,000 in total, and you’ll have a minimum down payment of 3.5% to make.
Energy-efficient mortgage (EEM)
EEM’s are insured by either the FHA or VA, and it lets you add the cost of energy-efficient upgrades to the loan amount. If you want to add a new heating and cooling system or new insulation to the home you purchase, and if you qualify for either an FHA or VA loan, an EEM may be a good idea.
Choosing The Right Mortgage Loan Type
To choose the right type of mortgage for your situation, review your financial situation and credit history with your lender. If you qualify for one of the government-backed loans, it’s often worthwhile to go that route. Otherwise, a more conventional mortgage might be your best course.