5 Types of Mortgage Loans to Consider

If you're in the market for a home, you're probably also in the market for a mortgage loan. And the type of loan you get is super important. There are five basic types of mortgage loans to consider:

• Fixed
• Adjustable 
• Conventional
• Jumbo
• Government-backed

That may seem like a lot, but there's good reason to take the time to get all the facts. For most families, buying a home is the single largest expenditure they'll have. It's not like buying an iPad or a cell phone you can turn over in a couple of years. So how you finance this potentially life-changing purchase needs to be a big part of your decision. It's not something to jump into without a lot of consideration.

I learned this when buying our first home. It was in a new development, so we worked with a builder, set a price, and put down earnest money (a good faith deposit). When the house was finished and we were ready to buy, the builder recommended a mortgage lender and gave us an appraisal. The appraisal came in at the purchase price we'd set.

But I worked for a company that was owned by a lending institution and had certain employee discounts and benefits. I got an appraisal from that lender, and it came in several thousand dollars lower! No way were we going pay more than the appraised value. We were ready to walk away from the house.

Fortunately, the builder finally agreed to lower the price. Also, the mortgage lender we went with took the time to explain all our options so we could choose the mortgage loan that was best for us.

That experience taught me two important home-buying lessons:

• Don't hesitate to negotiate the price.
• Go with a lender that's willing to educate you on your choices.

While I can't help you with your price negotiations, I can provide some basics on the most common types of mortgage loans. So when you talk to a lender, you'll be a little bit ahead of the game.

One of the first decisions is whether you want a fixed-rate or an adjustable-rate mortgage. With a fixed-rate mortgage, your interest rate is set for the life of the loan, usually 15 or 30 years.

That's what we opted for because we knew what we could afford to pay on a mortgage and didn't want any big fluctuations in our monthly budget. Initially you'll be paying more in interest. But over time, more of your payment amount goes to principal. A fixed-rate mortgage can be ideal if you plan to stay in your home for a long time.

Pros:

• Mortgage payment will be the same every month.
• Possible to lock in a low interest rate and keep it over the long term.

Cons:

• Will pay more in interest in the early years of the loan.
• Can't take advantage of lower interest rates unless you refinance.
• May be harder to qualify in a high interest environment.

With an adjustable-rate mortgage, your interest rate—and your payment—will fluctuate over time depending on the market. Often there will be a low introductory rate that lasts for a set number of years, then the rate will adjust, meaning it could go up or down as interest rates change. Usually there's a cap on how high or low it can go. This could be a good choice if you don't intend to stay in your home for very long because you'll be paying less interest in the early years.

Pros:

• Low initial interest rate.
• Interest rate caps.
• Could pay less over time if mortgage rates fall.

Cons:

• Risk of higher monthly payments if interest rates rise after your initial rate expires.
• Interest rate dependent on the market.
• Harder to budget if rates rise.

Once you decide on fixed or adjustable, you can look at different types of loans. Conventional mortgages are mortgages offered by private banks. There are two varieties:

1. Conforming loans (less than $766,000 in 2024, higher in high-cost counties).
2. Nonconforming, also called jumbo loans, which are above the conforming loan limits.

Conforming loans must meet certain income and down payment requirements that allow them to be resold to government entities like Fannie Mae and Freddie Mac.

Pros: 

• Can put down as little as 3%-5%.
• Can be used to purchase a second or vacation home.

Cons:

• Will have to pay private mortgage insurance (PMI) if putting down less than 20%.
• Typically must have a minimum credit score 620 and a debt-to-income (DTI) ratio lower than 50%.

If you live in a high-priced area, you may have to opt for a jumbo mortgage loan. This is a type of nonconforming conventional loan that allows you to finance a more expensive property, but it also comes with more qualifying criteria and higher borrowing costs.

Pros:

• Can buy a high-priced property.
• Can be used for a primary, second, or vacation home.

Cons:

• Larger minimum down payment requirements.
• Higher closing costs.
• Typically need a high credit score and low debt-to-income ratio.
• Possible cash reserve requirements.

Government-backed loans are insured by different federal agencies. If you're lucky enough to fit into one of the below categories, you may find a mortgage with more favorable requirements, fees, and terms.

Insured by the Federal Housing Administration, this is a government-backed loan for first-time home buyers. Buyers may have lower credit scores and low cash reserves for a down payment, but there are strict limits on the amount of the loan.

Pros:

• Low down payment.
• Lower credit score requirement and debt-to-income ratio.
• No income limits.
• Can include closing costs in mortgage payments.

Cons:

• Higher mortgage insurance premiums.
• Lower loan limits.
• Can only be used for primary home.

Backed by the U.S. Department of Veterans Affairs (VA), this loan is available to those who have served or are actively serving in the U.S. Armed Forces or National Guard and meet a minimum service requirement. Spouses may also qualify. There may be credit and income requirements depending on the lender, but generally borrowers with lower credit scores and no down payment can qualify.

Pros:

• No down payment or mortgage insurance.
• Available to both service members and their spouses.

Cons:

• May need to pay a VA funding fee at closing.
• Must meet specific service requirements.
• Can only be used for a primary home.

This loan, backed by the U.S. Department of Agriculture, is specifically for low-income borrowers purchasing a primary residence in qualified suburban or rural areas. To qualify, you can't make more than 115% of the area's median income. Other qualifications include a debt-to-income ratio of 41% or less and a credit score of at least 640. The good news is you don't need a down payment.

Pros:

• No down payment needed.
• Available to low-income borrowers with low credit scores.

Cons:

• Only available in certain areas.
• Can only be used for a primary home.

Mortgage loans aren't simple, and the decision you make today could affect you for 30 years. So, take the time now to compare mortgage companies. Make sure to work with a mortgage consultant who is big on education and willing to take the time to answer your questions and help you make an informed decision that's right for you. Getting a mortgage can be complicated with a lot of industry jargon and financial terms. If a lender won't provide answers to your questions, keep looking for someone who will help you.

This is an important long-term financial decision that you want to make carefully, but you don't have to feel stuck. If your circumstances change, it may be possible to refinance. For example, we were able to switch from a 30-year loan to a 15-year loan as our income went up. But while it may be possible to get a better loan term or a better rate down the road, the most important thing I can tell you is to take the time and get the information you need to find the mortgage loan that works for you right now. Then enjoy every minute in your home. We are—and it's now been 16 years!