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Types of mortgage loans

How to choose the right home loan for you

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Before you search new home listings and schedule tours, it’s a good idea to think about what type of mortgage you want to secure when you find the right house. With so many options available, it can be overwhelming to decide which is the best fit for your financial situation and homebuying goals.

From conventional loans to government-backed programs, each type of mortgage loan has its own pros and cons to consider.

Key insights

  • Different mortgage types have different financial requirements, making some loans easier for borrowers to qualify for.
  • Some loan types don’t require a down payment.
  • Whichever loan you choose, research your lender to ensure it has experience with your mortgage type.

What are the options for mortgage loans?

When it comes to mortgage loan options, there are several decisions you will need to make about how you want to repay your loan, including your term length and the type of rate (fixed or variable). Additionally, if you buy property that doesn’t fit under specific guidelines, you will need to use a nonconforming loan.

There is no right or wrong choice, since all options come with their own advantages and disadvantages.

Fixed-rate mortgages have a consistent interest rate throughout the life of the loan, no matter how the market trends. You can pay off your loan faster than the set term you choose. Fixed rates are preferred by most borrowers, especially when interest rates are low. The most popular fixed rates are the following:
  • 30-year fixed mortgage: A 30-year fixed-rate mortgage loan has a fixed interest rate for the 30-year duration of the loan.
  • 15-year fixed mortgage: Your interest rate on the mortgage will remain the same for the 15 years of the loan term.
Adjustable-rate mortgages (ARM) are home loans with interest rates that change based on market conditions. An ARM will have one rate for a period of time and then adjust based on market conditions and your loan agreement. For example, a 5/1 ARM will have a fixed rate for the first five years of the loan and then adjust once per year after that. Most of the time, adjustable interest rates fluctuate monthly, quarterly, annually or every three or five years.

“At this particular juncture where we are in an elevated rate market, we are advising our clients that if it makes sense and they qualify for an adjustable-rate mortgage, it is the way to go,” said Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage. “Almost all of the loans we are doing now will become refinances down the road, as everyone will want to take advantage of the next major market dip to secure a better long-term rate.”

Loan term is the length of time you have to repay the loan, such as 15, 20 or 30 years. Shorter loan terms usually come with higher monthly payments but result in lower interest charges. Longer loan terms, on the other hand, have lower monthly payments but result in more interest paid in the long run.
Conforming loans are mortgage loans that adhere to the guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises. These loans are at or below the loan limits set for the year for your area. Higher-cost cities typically have a higher loan limit than other areas of the country.

Nonconforming loans are often jumbo loans, which are available for purchases that exceed the loan limits. With jumbo loans, buyers can finance higher-priced properties — but they have to meet stricter qualification requirements.

Conventional loans

Banks and other lenders offer conventional mortgage loans, which aren’t backed by the government. They’re classified as either conforming or nonconforming, depending on whether they conform to federal mortgage loan limits and terms set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac.

With a conventional loan, buyers have the option to borrow more money and get more flexible mortgage terms than government-backed mortgages. These loans are harder to qualify for than government loans, since they require higher credit scores and lower debt-to-income (DTI) ratios.

There are several types of conventional loans programs buyers can consider in addition to traditional ones:

  • Conventional 97: Conventional 97 loans are offered by Fannie Mae to first-time homebuyers for an amount up to 97% of the property value. To qualify for a conventional 97 mortgage, the property must be a single-unit home that will be used primarily as a residence. Conventional 97 loans have fixed rates and carry a term of up to 30 years. Buyers will also have to take a homeowners education course.
  • HomeReady: Offered by Fannie Mae to low- and moderate-income buyers who need to buy or refinance a home, HomeReady offers a lower down payment and borrower contribution, more affordable mortgage premiums and a flexible approval process. It allows family members or friends to co-sign on your loan and considers income from other household members for approval. To qualify, you must meet an income limit requirement, typically equal to or less than the area median income. You need a minimum credit score of 620. Homeownership education is required.
  • Home Possible and Home Possible Advantage: Offered by Freddie Mac to low- and moderate-income borrowers, these loans are for one- to four-unit homes, condos, planned unit development homes (PUD) and manufactured homes. These mortgages require a 3% down payment and credit scores as low as 660. It also has fixed or adjustable rates and carries a term of up to 30 years. They differ in the properties they finance, rate pricing adjustments, loan-to-value ratio (LTV) for each property and loan amounts.

Whom it’s best for:

Conventional mortgages are usually best for prospective homebuyers with a strong credit history, stable income and the ability to make a down payment of at least 5%. Conventional mortgage loans can be used to finance a primary residence, secondary home or investment property.

Government-backed loans

When a government agency, such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or the Department of Agriculture (USDA), insures a home loan that is issued by a private lender, that mortgage is considered a government or government-backed loan. All government-backed loans are within maximum conforming loan limits, which is $726,200 in most areas (up to $1,089,300 in high-cost areas) for 2023.

The downside is that even though you might secure a better rate for your current financial situation, government-backed mortgage loans have stricter property guidelines and higher fees. Not everyone will qualify, and even if you do, your home choice will have to fit specific conditions and price standards.

Whom it’s best for:

If you have low to moderate income or a less-than-great credit score, government-backed mortgages are typically easier to qualify for than conventional mortgage loans. FHA, VA and USDA loans have more relaxed lending guidelines and payment terms and might not require a down payment.

Nonconforming loans

Nonconforming loans generally require larger down payments and come with higher mortgage interest rates than conforming loans. However, you can borrow a larger amount than with a conforming loan.

Jumbo loans, a type of nonconforming mortgage, are for amounts higher than the limits set by the FHFA. Currently, loans for greater than the conforming jumbo limit in a given county are considered nonconforming “jumbo” loans.

There are also super jumbo loans, which are intended for buyers who want to acquire bigger and more expensive homes. The loan limits are higher than those of jumbo loans and carry fixed or adjustable rates. The down payment normally ranges between 10% and 20%. To qualify, borrowers must have large incomes and assets, excellent credit history and low DTI ratios.

These loans are issued by private jumbo lenders, such as banks and other financial institutions. The private lenders set their own rules on requirements and approval and typically hold the loans as investments.

Note that while jumbo loans still can have competitive interest rates and loan term options like a conventional loan, you can expect a higher down payment requirement and higher closing costs and fees. Jumbo loans are harder to qualify for than conventional loans due to their stricter credit requirements.

Whom it’s best for:

Jumbo (nonconforming) mortgages are best for those who want to buy a really expensive house and have the credit score to qualify. Generally, nonconforming loans are best for high-income homebuyers who want to borrow above the limits of conforming loans and are willing to make a larger down payment.

» MORE: What is a jumbo loan and am I eligible?

Other types of mortgages

Not all mortgage types fit neatly into the conventional or government-backed mortgage category. These other loans are suitable for buyers who need additional funds to renovate at the time of purchase, as well as current homeowners who want to tap into their equity or change their terms.

If you want to take on a fixer-upper, you can borrow money for the necessary renovations alongside your new mortgage loan. You can also get a renovation loan for a home you already own.

There are three types of renovation loans:

  • 203(k) loan: A 203(k) loan combines the purchase of a home and the cost of renovations into one loan — or you can use the 203(k) program to rehabilitate an existing home. The cost of the renovations must be at least $5,000, and the home value must be within FHA limits.
  • HomeStyle Renovation loan: Fannie Mae HomeStyle Renovation loans provide funds to borrowers for renovations, repairs or improvements at the time of purchase or refinance. ENERGY STAR-certified improvements qualify for the $500 LLPA Credit.
  • CHOICERenovation loan: A CHOICERenovation loan from Freddie Mac lets you roll the purchase price and renovation costs into one single closing transaction. CHOICERenovation loans can be used with fixed- or adjustable-rate loan products.
If you need to change your current mortgage terms or tap into your equity, a refinance loan can do both. A refinance replaces your existing mortgage with a new one. Home equity loans and home equity lines of credit (HELOCs) are types of second mortgages that add another payment to your existing mortgage.

Here are the major types of home refinance loans and second mortgages:

  • Rate-and-term refinance: With a rate-and-term refinance, you get a new mortgage with a different interest rate and/or term length. The result might be a lower monthly mortgage payment or paying less in interest.
  • Cash-out refinance: In a cash-out refinance, you get a new mortgage for an amount higher than your principal balance; you can use the extra cash for any purpose.
  • Home equity loan: A home equity loan, a type of second mortgage, allows homeowners to borrow against the equity in their home and pay the money back over time.
  • Home equity line of credit (HELOC): This type of second mortgage is set up as a revolving line of credit — like with a credit card — and you can borrow up to a limit that’s based on your home equity. You pay back only what you borrow.
  • Reverse mortgage: A reverse mortgage allows older homeowners to supplement their income by receiving a lump sum or regular payments from a lender in exchange for equity in their home. The loan is due back only when the borrower dies or sells the property.

» MORE: Reverse mortgage vs. home equity loan vs. HELOC.

How to compare the different types of mortgage loans

When trying to choose a mortgage, start by comparing the interest rates and fees for each loan. Lower interest rates are better, since they mean you'll pay less money in interest over the life of the loan, but don’t rely on interest rates alone to tell you if you are getting a good deal — review the annual percentage rate (APR), which includes all fees. For example, if you choose a USDA loan, you will be tied to an additional 1% closing fee and 0.35% annual fee.

Another thing to consider before choosing your mortgage type is where you are financially as a buyer. Do you have an excellent credit score and a generous-sized down payment? A conventional loan will most likely give you the best rate and allow you to have more freedom in house choice. However, if your credit score is not the best or you don’t have more than 5% saved, a government-backed loan can help you still accomplish your homeownership goals.

Reaching out to a lender will give you a better understanding of which loan types are right for your finances and housing needs, as well as any issues you need to address before applying for preapproval.

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    Is a mortgage a secured loan?

    Yes, a mortgage loan is backed by collateral. In other words, the physical house or property is attached to the financing. The lender holds a lien on the property, which means that if the borrower defaults on the loan, the lender has the right to foreclose on the property and sell it to recover the outstanding balance.

    What is the difference between Fannie Mae and Freddie Mac?

    Fannie Mae and Freddie Mac are both government-sponsored enterprises. The main difference between the two is Fannie Mae tends to buy mortgages from larger lenders, while Freddie Mac purchases mortgages from smaller banks and credit unions.

    Can you change your mortgage type?

    Yes, and the easiest way to do this is through a home refinance. When you refinance your home, you’re taking out a new loan, but usually without jumping through as many hoops as you did when you first purchased. With a refinance, you can change the rate, the loan terms and even the loan type.

    Bottom line

    Understanding the different types of mortgage loans available is an important early step in choosing the best home loan for you or your family. The best type of mortgage for you will depend on factors like your credit score, income level and loan term preferences. Comparing multiple lenders will ensure you get the best terms on your home loan.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Fannie Mae, "97% Loan to Value Options." Accessed April 24, 2023.
    2. Federal Deposit Insurance Corporation, “HomeReady Mortgage." Accessed April 24, 2023.
    3. Federal Deposit Insurance Corporation, “Home Possible Advantage." Accessed April 24, 2023.
    4. Consumer Financial Protection Bureau, “Conventional loans." Accessed April 24, 2023.
    5. U.S. Department of Housing and Urban Development, “203(K) REHAB MORTGAGE INSURANCE.” Accessed April 28, 2023.
    6. Fannie Mae, “HomeStyle Renovation.” Accessed April 28, 2023.
    7. Freddie Mac, “CHOICERenovation Mortgages.” Accessed April 28, 2023.
    8. U.S. Department of Agriculture, “Upfront Guarantee Fee & Annual Fee.” Accessed May 11, 2023.
    9. U.S. Bank, “What’s the difference between Fannie Mae and Freddie Mac?” Accessed May 16, 2023.
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