Types of Mortgages: Compare Home Loan Options

Choosing a mortgage is one of the biggest financial decisions you'll make when buying a home. The type of mortgage you choose can affect your monthly payment, total borrowing costs, down payment requirements, and how much flexibility you have over time. Understanding the different types of mortgages can help you compare options and make an informed decision.

Mortgage loans can be grouped by the type of loan and the interest-rate structure. Understanding each can help you compare mortgage options and choose the loan that bests fits your situation.

Conventional mortgages are mortgages offered by private lenders. There are two varieties: conforming loans or nonconforming (jumbo) loans.

These loans fall within limits set annually by the Federal Housing Finance Agency (FHFA)—$832,750 for a single-family home in 2026, with higher limits in high-cost counties. Conforming loans must meet certain income, credit, and down payment requirements, which allow them to be resold to government-sponsored enterprises like Fannie Mae and Freddie Mac. They require relatively low down payments—sometimes as little as 3% to 5%—and can be used to purchase a primary residence, second home, or vacation property. However, borrowers who put down less than 20% are typically required to pay private mortgage insurance (PMI), and qualifying often requires a minimum credit score around 620 and a debt-to-income (DTI) ratio below 50%.

Nonconforming loans are loans that do not meet the guidelines for a conforming loan. A jumbo loan is a common type of nonconforming loan, where the loan amount exceeds conforming loan limits. This type of nonconforming loan allows you to finance a more expensive property, but it also come with more qualifying criteria and higher borrowing costs. These loans are typically used by borrowers purchasing more expensive homes who have strong credit, higher income, and the ability to make a larger down payment.

Government-backed loans are insured by different federal agencies. If you 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 often used by first-time home buyers. It may allow for lower credit scores and smaller down payments than conventional loans, and there are no income limits to qualify. However, borrowers are required to pay mortgage insurance premiums, loan amounts are capped, and the loan can only be used to purchase a primary residence.

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. Borrowers are typically required to pay a VA funding fee, and the loan can only be used to purchase a primary residence.

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.

Mortgage loans can also be categorized by how the interest rate is structured. The two primary options are fixed-rate mortgages and adjustable-rate mortgages (ARMs). The interest-rate structure you choose affects your monthly payment, how much interest you pay over time, and how much certainty you'll have about future housing costs.

With a fixed-rate mortgage, your interest rate is locked in for the life of the loan—typically 15 or 30 years. Because the interest rate doesn't change, your principal and interest payment stays the same each month, making it easier to budget and plan for long-term housing costs. (Keep in mind that your total monthly payment could still change if property taxes or homeowners insurance increase.)

A fixed-rate mortgage may be a good choice if you:

• Plan to stay in your home for many years
• Prefer predictable monthly payments
• Want protection if market interest rates rise

With an adjustable-rate mortgage, your interest rate is fixed for an introductory period—such as five, seven, or 10 years—before adjusting periodically based on market rates. As a result, your monthly payment may increase or decrease over time. Most ARMs include limits, known as caps, on how much the interest rate can change at each adjustment and over the life of the loan.

Common ARM structures include:

• 5/6 ARM: Fixed for five years, then adjusts every six months
• 7/6 ARM: Fixed for seven years, then adjusts every six months
• 10/6 ARM: Fixed for 10 years, then adjusts every six months

The first number indicates how many years the interest rate remains fixed. The second number indicates how often the interest rate can adjust after the initial fixed-rate period ends.

With a 7/6 ARM, for example, your interest rate is fixed for the first seven years. After that, it may adjust every six months based on market conditions, which means your monthly payment could increase, decrease, or stay the same, subject to the loan's rate caps.

An ARM may be a good choice if you:

• Expect to sell your home or refinance before the introductory rate expires
• Want a lower initial interest rate and monthly payment
• Are comfortable with the possibility of future payment changes

Some less common mortgage options are designed for specific financial situations or borrowing needs.

A construction loan is a short-term loan used to finance the building of a home. Funds are typically disbursed in stages as construction progresses. Some construction loans must be paid off or refinanced once the home is complete, while others—known as construction-to-permanent loans—automatically convert into a traditional mortgage. These loans can be more complex and may require a higher down payment and strong credit.

A reverse mortgage allows homeowners—typically age 62 or older—to borrow against the equity in their home without making monthly mortgage payments. Instead, the loan is repaid when the borrower sells the home, moves out, or passes away.

An interest-only loan allows you to pay only interest for a set period before switching to payments that include both principal and interest. This can lower initial payments but may increase costs and payment amounts later.

A balloon mortgage offers lower monthly payments for a set period, followed by a large lump-sum payment (known as a balloon payment) due at the end of the term. Borrowers often plan to refinance or sell the home before the final payment comes due.

Choosing a mortgage isn't just about finding the lowest interest rate. The right loan depends on your financial situation, how long you plan to stay in the home, and how much risk you're comfortable taking. As you compare mortgage options, consider the following:

• Loan type: Decide whether a conventional loan or a government-backed loan, such as an FHA, VA, or USDA loan, best fits your financial situation and eligibility.
• Interest-rate structure: Consider whether the predictable monthly payments of a fixed-rate mortgage or the potential savings—and risks—of an adjustable-rate mortgage (ARM) better match your plans.
• Down payment: Some loan types require a larger down payment than others, which can affect both your upfront costs and your monthly payment.
• Monthly payment and total borrowing costs: A lower monthly payment doesn't always mean a less expensive loan. Compare interest rates, fees, mortgage insurance, and the total amount you'll pay over the life of the loan.
• How long you plan to stay in the home: If you expect to move within a few years, certain loan structures may be more appropriate than if you plan to stay in the home long term.

It's also a good idea to compare offers from multiple lenders so you can evaluate interest rates, closing costs, fees, and loan terms before making a decision.