Though some people choose to pay for a home in full with cash, that is not the case for most. The majority of people who buy a home jump in with a lot of questions, and one of the biggest debates is how to find the right rate and mortgage. A mortgage loan is when a buyer seeks help via a lender to purchase a home. And the first thing most buyers ask themselves when starting out is, “What type of mortgage loan should I get?”

How It Works

Not all types of mortgage loans are the same, and it’s important to understand the benefits and disadvantages of each mortgage type before purchasing a home. This activity explains each mortgage type individually and outlines the best type of mortgage loan for your situation by providing pros and cons for each one. Use the dropdown arrow to select the mortgage you’d like to learn about.

Types of Mortgage Loans to Explore

Fixed-Rate Mortgages

Fixed rate mortgages are the most common loan type and are generally seen as offering the most stability for homebuyers. A fixed-rate mortgage ensures that the loan maintains the same interest rate throughout the loan term. Meaning, if the Fed raises interest rates, the interest rate on a fixed-rate mortgage is locked in and won’t increase as well. This is great for a borrower who wants a predictable monthly payment and is planning to stay in their home for many years.

Adjustable-Rate Mortgages (ARMs)

The opposite of a fixed-rate mortgage, an adjustable-rate mortgage varies over time based on the rise and fall of the market. This mortgage type is considered a long-term home loan because it has two periods: a fixed-rate introductory period, then an adjustable-rate period. The fixed-rate period occupies the initial (5 to 10) years of the loan. During these years, the loan’s interest rate is fixed, meaning it doesn’t fluctuate.

That interest rate won’t last, however. When the second period—the adjustable-rate period—starts, the interest rate on the loan will fluctuate periodically, making it a more hands-on process to budgeting out monthly expenses. Why would a borrower want an adjustable-rate mortgage? Well, in truth, these loans typically allow for a lower interest rate (at least during the initial loan period) than a fixed-rate mortgage. So if you don’t mind a possible change in monthly payments, perhaps an adjustable-rate mortgage is for you.

Interest-Only Mortgages

Interest only loans require a borrower to make only interest payments for a set period of the loan term, meaning the principal—or the amount of money borrowed without interest—doesn’t decrease at all during this time, which is typically 5-10 years. The monthly payments are lower during this time, similar to an adjustable-rate mortgage. The main difference between an ARM and an interest-only mortgage is that none of the money you pay goes towards principal; like the name implies, it’s going toward interest only. Though it’s great to have lower payments at the start of the loan, it’s also important to assess your ability to afford the loan when the payments increase—often dramatically, since you’ve previously paid only toward interest. When the interest-only period does end, this type of mortgage can turn from manageable to high-risk overnight for many borrowers.

Balloon Mortgages

A balloon mortgage is when a borrower makes low or no monthly payments for a set period at the beginning of the loan. Once that period ends, they’ll need to pay a large, one-time “balloon payment” that settles the remaining balance in full. This type of mortgage is a lot less common now than it used to be and those who usually do choose to use them, are those buying commercial real estate or borrowers with short-term financing needs.

Government-Backed Mortgages

Federal Housing Administration (FHA) Loans

Perhaps one of the most talked about loans, Federal Housing Administration or FHA loans are mortgages meant for low-to-moderate-income borrowers. These loans are also great for first home buyers and repeat buyers that are just trying to get their foot into the market. This loan allows for a downpayment as low as 3.5% and the loan be transferred to a new buyer, adding an extra benefit when trying to sell your home. If you have a lower-rate locked in, you can potentially transfer the loan and its favorable terms to a new buyer, which makes your home more attractive if rates have escalated.

VA Loans

Veterans Affairs or VA loans are available for active duty service members, veterans, and some surviving spouses. These loans don’t require a down payment upon purchase, nor do they require the borrower to pay PMI (Private Mortgage Insurance) which is typically required for any loan where buyers put down less than 20% of the loan’s principal. These loans also typically qualify for lower interest rates.

USDA Loans

These loans are offered for properties located in an eligible rural area, as defined by the USDA. Similar to VA loans, these loans don’t require a down payment and have lower interest rates.

Specialized Mortgage Loans

Jumbo Loans

Jumbo loans are set aside for properties that exceed the loan limits set by the Federal Housing Finance Agency (FHFA) such as luxury properties. To qualify, borrowers must usually have a credit score of 700 or above and pay a larger down payment (typically 20% and above). This loan is good for you if you’re looking to purchase a high-value home and have a strong financial profile.

Reverse Mortgage Loans

There are three types of reverse mortgages. What are they and how do they affect you?

Single-Purpose Reverse Mortgages

A reverse mortgage is a type of loan available for senior homeowners (ages 62 or older) that allows them to borrow money against the equity of their home. You might consider a Single-Purpose Reverse Mortgage if you need financial assistance for a specific expense, such as:

• Home Repairs: Funds can be used to make necessary repairs or improvements to the home.
• Property Taxes: Helps homeowners pay property taxes or other specific housing-related expenses.
• Limited Scope: As the name suggests, these loans are for a single, specified purpose and cannot be used for other expenses.

They’re usually offered by state and local government agencies and nonprofit organizations and unlike a traditional mortgage, where you make monthly payments to the lender, with a reverse mortgage, the lender makes payments to you. The specific mortgage could offer potential lower costs and fees compared to other reverse mortgages.

Home Equity Conversion Mortgages (HECMs)

You might consider an HECM if you’re 62 years of age or older and want flexible access to your home equity. This option provides financial flexibility and security in retirement. Counseling is required before obtaining a HECM largely because these loans accrue interest and reduce equity.

HECMs are the most common type of reverse mortgage and can be used for any purpose so long as the borrower meets certain requirements. These loans are federally insured, backed by the U.S. Department of Housing and Urban Development (HUD) whose purpose is to address housing needs, improve/develop communities, and enforce fair housing laws. HECMs are the most common type of reverse mortgage and can be used for any purpose:

• Supplementing Retirement Income: Provides additional income for retirees to cover living expenses.
• Debt Consolidation: Pay off existing debts, including a traditional mortgage.
• Flexibility: Funds can be used for any purpose, including travel, healthcare, or other personal needs.

Proprietary Reverse Mortgages

Proprietary reverse mortgages are private loans offered by individual companies. These loans offer an alternative for those whose homes exceed the value limits set by HECMs, which is a maximum borrowing limit of $1,149,825 as of Jan. 1, 2024. If you have a high-value home and need flexible terms, you might benefit from a proprietary reverse mortgage.

There is no “best type of mortgage” for the general public. A lot of what is offered is very dependent on the multiple factors of a homebuyer’s situation. Think about what you want in a loan and which loan suits your situation best. Perhaps you can get a better rate based purely on age, vocation, or a potential property’s geographical location.

Whether you opt for the stability of a fixed-rate mortgage, the initial lower rates of an adjustable-rate mortgage, or a specialized loan like an FHA or VA loan, knowing your options helps you choose the best mortgage for your financial situation and long-term goals.

It’s important to thoroughly research different types of mortgage loans and seek professional advice to find the best option for you. Always consider personal financial situations and long-term goals when choosing a mortgage so you know for sure what type of mortgage you can afford.

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