10 Types of Mortgage Loans to Know About | LendingTree (2024)

As a homebuyer, it can be overwhelming to determine which mortgage provides the best value, is within your reach and serves your long-term homeownership needs. Here, we’ve summarized the key features of 10 types of mortgage loans to help in your decision.

On this page

  • Conventional loans
  • Fixed-rate mortgages
  • Adjustable-rate mortgages
  • High-balance loans
  • Jumbo mortgages
  • FHA loans
  • VA loans
  • USDA loans
  • Second mortgages: home equity loans and HELOCs
  • Reverse mortgages
  • Summary: What this means for you

1. Conventional loans

A conventional loan is any mortgage that’s not backed by the federal government. Conventional loans have higher minimum credit score requirements than other loan types — typically 620 — and are harder to qualify for than government-backed mortgages. Borrowers who make less than a 20% down payment are typically required to pay private mortgage insurance (PMI) on this type of mortgage loan.

The most common type of conventional mortgage is a conforming loan. It adheres to Fannie Mae and Freddie Mac guidelines and has loan limits, which often change annually to adjust for increases in home values. The 2023 conforming loan limit is $726,200 for a single-family home in most of the U.S.

Key features:

  • Require a minimum 620 credit score
  • Require borrowers to provide in-depth income, employment, credit, asset and debt documentation for approval
  • Typically require PMI for a down payment of less than 20%
ProsCons

Can be used for a wide variety of purchases, from a primary home to an investment property

You can get rid of PMI once you reach 20% equity

Must have at least a 3% down payment

You must pay PMI if you put down less than 20%.

Ideal for: Borrowers with a steady income and employment history, strong credit and at least a 3% down payment.

2. Fixed-rate mortgages

A fixed-rate mortgage is exactly what it sounds like: a home loan with a mortgage interest rate that stays the same for the entire loan term. The rate included on your closing disclosure is the same rate you’ll have for the length of your repayment term, unless you refinance your mortgage.

Two common fixed-rate options are 15- and 30-year mortgages. Unlike some other types of mortgage loans that have variable rates, fixed-rate loans offer more stability and predictability to help you better budget for housing costs.

Key features:

  • Include a fixed interest rate that won’t change over the life of the loan
  • Usually come in repayment terms of five-year increments, though some lenders let you pick from custom loan terms
ProsCons

Your monthly principal and interest payments won’t change because your interest rate won’t change

Longer term lengths mean paying more interest overall

Interest rates are initially higher than adjustable-rate mortgages (ARMs)

Ideal for: Borrowers who prefer stable principal and interest payments on their mortgage.

3. Adjustable-rate mortgages

An adjustable-rate mortgage (ARM) is a type of mortgage loan that has a variable interest rate. Instead of staying fixed, it fluctuates over the repayment term. One popular ARM option is the 5/1 ARM, which is considered a hybrid mortgage because it has both a fixed-rate period and a period where the rate adjusts on a recurring basis.

With a 5/1 ARM, the interest rate is fixed for an initial period of five years and then adjusts annually for the remainder of the loan term. ARMs usually start off with lower rates than fixed-rate loans but can go as high as five percentage points above the fixed rate when they adjust for the first time.

Beginning May 1, 2023, you may also have to pay higher interest rates or an extra fee at closing if you choose a conventional ARM. The extra cost will apply to those borrowing more than 90% of their home’s value and will be 0.25% of the loan amount.

Key features:

  • Include a variable rate, which can change based on market conditions
  • Typically begin with a mortgage rate that is lower than fixed-rate loans
  • Come with a lifetime adjustment cap, which often means the variable rate can’t jump by more than five percentage points over the life of the loan
ProsCons

Monthly payments will be more affordable than a fixed-rate loan during the initial period

Can help you pay significantly less in interest over the life of the loan

A riskier loan option because you don’t know exactly what payment amounts you're signing up for

If you have a plan to refinance or sell before the loan adjusts, you may be in trouble if the home’s value falls or the market takes a downturn

Ideal for: Borrowers who plan to move or refinance before the fixed-rate period on their loan ends.

4. High-balance loans

A high-balance loan is another type of conventional loan. In a nutshell, it’s a loan with a balance that exceeds the standard conforming loan limit, but it is still considered to be conforming because it stays within the loan limit that the Federal Housing Finance Agency (FHFA) has set for localities it recognizes as high-cost areas.

The high-balance loan limit for single-family homes in 2023 is $1,089,300, which is 150% of the standard loan limit mentioned above.

Key features:

  • Adhere to Fannie Mae and Freddie Mac guidelines
  • Allow borrowers to borrow above standard loan limits in high-cost counties
ProsCons

Puts conforming loans in reach for borrowers buying in especially expensive markets

Often offers lower interest rates and down payment requirements than jumbo loans

May have higher interest rates than a typical conventional loan

Under Fannie Mae guidelines, every co-borrower on a loan has to have a credit score

You won’t be able to use Fannie Mae’s 3% down-payment loan options

Can only be used in designated locations

Ideal for: Borrowers who want a conventional loan in an area where home prices are higher than average.

5. Jumbo mortgages

A jumbo mortgage is a larger conventional loan, typically used to buy a luxury home. Jumbo loan amounts exceed all conforming loan limits and often require a large down payment of at least 20%.

Jumbo loans differ from high-balance conforming loans in that jumbo loans don’t conform to the guidelines put in place by Fannie Mae and Freddie Mac. You may also qualify to borrow more with a jumbo loan than a high-balance loan — perhaps $1 million or more — if you’re eligible.

In recent years, jumbo mortgage rates haven’t been significantly higher or lower on average when compared with conforming conventional loans.

Key features:

  • Allow for larger loan amounts, even if they exceed the limits for conforming loans
  • Have stricter credit score and down payment requirements than conforming loans
  • Require a large down payment
ProsCons

Can be used for a wide range of property types

Interest rates are similar to conforming conventional loan rates

A larger down payment is required if you want to use it for a second home or investment property

Require high credit scores (typically 680 to 700 and above)

Ideal for: Borrowers who need a mortgage that exceeds conforming loan limits.

6. FHA loans

The Federal Housing Administration (FHA) backs these types of mortgage loans, which cater to borrowers with credit blemishes and limited down payment funds. You can qualify for an FHA loan with a 580 credit score and a minimum 3.5% down payment. If your score is between 500 and 579, you’ll need a 10% down payment. In 2022, the FHA loan limit in most U.S. counties is set at $420,680 for single-family homes. In high-cost areas, the FHA loan limit is $970,800.

FHA loans have mandatory mortgage insurance premiums. If you put down less than 10%, you’ll pay FHA mortgage insurance for the life of your loan — unless you refinance into a conventional loan after building at least 20% equity. Otherwise, you’ll only pay it for 11 years if you put down at least 10%.

10 Types of Mortgage Loans to Know About | LendingTree (2)

Good News for Borrowers Paying FHA Mortgage Insurance

FHA mortgage insurance is getting cheaper in 2023. As of March20, the Federal Housing Administration (FHA) reduced its annual insurance premiums by 0.30 percentage points. That’s good news for the average FHA borrower, who will save around $800 per year as a result.

Key features:

  • Require just a 580 credit score to qualify for the minimum down payment amount
  • Include a mortgage insurance premium requirement for most borrowers
  • Come with the ability to buy a multi-unit property with up to four units as a primary residence with just 3.5% down (and at least a 580 score)
ProsCons

Available to first-time and repeat buyers

No income limits

Easier to qualify for than conventional loans

You must live in the property, even if you rent out other units

Loan limits are lower than what some conventional loans can offer

You'll pay mortgage insurance premiums

Ideal for: Borrowers with lower credit scores and access to minimal savings for a down payment.

7. VA loans

Military servicemembers, veterans and eligible spouses may qualify for a loan backed by the U.S. Department of Veterans Affairs (VA).

In the vast majority of cases, VA loans don’t require a down payment. While the VA doesn’t have a minimum credit score requirement, VA lenders may expect to see a minimum 620 credit score. Additionally, the VA no longer has loan limits for borrowers who have never used their VA loan benefits or have paid their existing VA loans in full.

Key features:

  • Provide opportunities for members of the military, veterans and eligible spouses to buy a home
  • Don’t require a down payment in most cases
ProsCons

No income or loan limits

No mortgage insurance requirement

Competitive interest rates

Offers loans for buying or building a home, renovating or buying a manufactured home

Must pay a VA funding fee

Must use VA-approved appraisers and, if building a custom home, VA-approved builders

Ideal for: Qualified military borrowers who need a no-down-payment loan option.

8. USDA loans

The U.S. Department of Agriculture (USDA) insures USDA loans provided to low- and moderate-income buyers looking to purchase homes in designated rural areas. No down payment or mortgage insurance is required for these types of home loans, but there are income limitations.

Key features:

  • Cater to borrowers interested in buying homes in USDA-designated rural areas
  • Don’t require a down payment or mortgage insurance
ProsCons

Available for a wide range of home types ranging from single-family homes to condos, modular and manufactured homes and newly constructed homes

No down payment

No mortgage insurance

Some USDA loans have limitations on how big the property can be and what amenities it can have

The home must be your primary residence

Must pay an annual guarantee fee

Ideal for: Borrowers with a modest income looking for a 0%-down-payment loan.

9. Second mortgages: Home equity loans and HELOCs

A second mortgage is a different type of mortgage loan that allows you to borrow against the equity you’ve built in your home over time. Similar to a first mortgage, which is the loan you use to buy a home, a second mortgage is secured by your home. However, a second mortgage takes a subordinate position to a first mortgage, which means it’s repaid after a first mortgage in a foreclosure sale.

Both home equity loans and home equity lines of credit (HELOCs) are types of second mortgages. A home equity loan is a lump-sum amount. It typically comes with a fixed interest rate and is repaid in fixed installments over a set term. A HELOC is a revolving credit line with a variable rate that works similarly to a credit card. The funds can be used, repaid and reused as long as access to the credit line is open.

10 Types of Mortgage Loans to Know About | LendingTree (3)

Rate Changes on Subordinate Loans in 2023

Beginning May 1, 2023 the rules around conventional loans are changing and could make having second mortgage loans — including the home equity loans and HELOCs often used as piggyback loans — more expensive for some borrowers. Under the previous rules, the fees charged for a subordinate loan varied according to the LTV of both the first and second loans and the borrower’s credit score. Under the new rules, fees will depend on the LTV of the first mortgage but will only be charged if the combined loan-to-value (CLTV) ratio of both loans is higher than the LTV for the first loan. This could be a positive for borrowers with home equity lines of credit with a balance of zero.

Key features:

  • Allow borrowers to tap their home equity for any purpose, including debt consolidation or home improvement
  • Include lump-sum and credit line options
  • Use a borrower’s home as collateral, just like a first mortgage
ProsCons

Can be used to purchase or refinance a home

Can be used by homeowners without a first mortgage in some cases

Rates and qualification requirements are more stringent than for first mortgages

Ideal for: Borrowers who want to use their existing equity to fund other financial goals.

10. Reverse mortgages

Homeowners age 62 and older may qualify for a reverse mortgage, a mortgage loan type that differs from a traditional “forward” home loan. Instead of you making payments to your lender, your reverse mortgage lender makes payments to you — from your available equity — in a lump sum or monthly.

The home equity conversion mortgage (HECM) is the most common type of reverse mortgage. It’s insured by the FHA and comes with several upfront and ongoing costs. HECMs, like FHA loans, also have loan limits. For 2023, the maximum loan limit for an HECM is $1,089,300. You have many options for repaying a reverse mortgage, including selling your home or refinancing to take out a new, forward mortgage to cover what’s owed.

Key features:

  • Don’t require payments until the home is sold or the borrower (or eligible surviving non-borrowing spouse) moves out or dies
  • Require borrowers to have at least 50% equity in their home
  • Require borrowers (or surviving spouses) to continue to maintain the home, live in it as a primary residence and pay property taxes and homeowners insurance
ProsCons

No income or DTI ratio requirements

No monthly payments unless you move out of the house

Income from the reverse mortgage payouts won’t be taxed

Your heirs won’t inherit an underwater home

You can pay off a first mortgage with the reverse mortgage

You can use the funds to purchase a home

For married couples, the youngest spouse’s age determines qualification

Failure to properly maintain the house or pay property taxes or home insurance can lead to foreclosure

Come with significant costs and fees including:

  • Lender fees (up to $6,000)
  • An upfront mortgage insurance premium (2% of your home’s value)
  • Annual mortgage insurance premiums (0.5% of the loan amount)

Ideal for: Older homeowners (62 and older) with a substantial amount of equity who need supplemental retirement income.

Summary: What this means for you

First-time homebuyers

If you’re buying a home for the first time and want a predictable principal and interest payment each month, focus on fixed-rate mortgage quotes while loan shopping. Additionally, if you have a few credit blemishes to work through and limited down payment funds, an FHA loan may work well for your financial situation.

Buyers looking for a second home

Government-backed mortgage programs (FHA, VA and USDA loans) are reserved for homebuyers looking to finance the purchase of a primary residence, so you’ll need to zero in on conventional loans if you’re buying a vacation home. Remember: You’ll need to contribute at least a 10% down payment toward your second home purchase.

Military homebuyers

You can skip down payment and mortgage insurance requirements if you’re eligible for a VA loan. Military service members, surviving spouses and veterans may save thousands by choosing this loan type, plus there’s a cap on what you’ll pay out-of-pocket for closing costs.

Real estate investors

If you’re interested in buying a home to earn rental income, you might consider using a home equity loan or HELOC to cover your investment property down payment. You’re typically required to put down 15% to get a conventional loan for a rental property, but going the house hacking route with a FHA or VA loan for a multifamily home means your minimum down payment drops to a range between 0% and 3.5%.

10 Types of Mortgage Loans to Know About | LendingTree (2024)

FAQs

How many types of mortgages are there? ›

The two main types of mortgage loans are: Simple mortgage: The lender has the right to sell the mortgaged property if there is a payment default. Usufructuary mortgage: The possession is transferred to the lender. The lender can receive rent or profit from it without putting a personal liability on the borrower.

What are the most common types of mortgages? ›

Conventional mortgages are the most common type of mortgage. That said, conventional loans may have different requirements for a borrower's minimum credit score and debt-to-income ratio (DTI) than other loan options.

What are the four C's of mortgage lending? ›

So, what do lenders look at when deciding to approve or deny an application? Lenders consider four criteria, also known as the 4 C's: Capacity, Capital, Credit, and Collateral. What is your ability to pay back your mortgage?

What is the most common form of mortgage loan? ›

About 90% of home buyers choose a 30-year fixed-rate loan, making it the most popular mortgage type in the country. As its name suggests, the interest rate does not change over 30 years. This means that borrowers can enjoy lower monthly payments because the mortgage is stretched over a long time.

What are the different types of loans? ›

Following are the different types of bank loans in India that are provided by the banks and financial institutions:
  • Secured Loans. Secured loans are those loans that are provided against security. ...
  • Unsecured Loans. ...
  • Home Loans. ...
  • Gold Loans. ...
  • Gold Loans. ...
  • Vehicle Loans. ...
  • Loan Against Property. ...
  • Loan Against Securities.
Feb 13, 2023

What is the easiest type of mortgage to get? ›

Government-backed loan options, such as FHA, USDA and VA loans, are typically the easiest type of mortgage to get because they may have lower down payment and credit score requirements compared to conventional mortgage loans.

What are the 4 types of qualified mortgages? ›

Also, for all types of QMs, the points and fees may not exceed the rule's specified points-and-fees caps. What Are the Different Types of QMs? There are four types of QMs – General, Temporary, Small Creditor, and Balloon-Payment.

What are 5 mortgages? ›

The “5” is the fixed-rate period of the mortgage — the first five years. The “1” is how often the interest rate adjusts after that — once per year. Another common mortgage is the 5/6 ARM, which adjusts every six months after the initial five-year period.

Which type of mortgage is the most risky? ›

With their changing interest rates, adjustable-rate mortgages (ARMs) are a particularly risky choice for borrowers with less-than-ideal financial situations. In fact, some fixed-rate mortgages can also be problematic under the wrong circ*mstances.

What type of mortgage has the lowest interest rate? ›

What type of home loan has the lowest interest rate? VA loans typically have the lowest interest rates. However, the VA program is only available to eligible service members and veterans. For non-VA buyers with strong credit, a conventional loan will typically offer the lowest rates.

Which type of home loan is the most stable? ›

Fixed home loan interest rate is one where the rate does not fluctuate with changes in market forces. This rate remains steady throughout the tenor of the loan.

What are the 4 pillars of lending? ›

Credit score, income, employment and down payment are the four pillars of the loan approval process. Your approval, interest rate and program will largely be based on a combination of these four items. That being said, these four are not the only factors that constitute loan approval.

What does PITI stand for? ›

Principal, Interest, Taxes, and Insurance, known as PITI, are the four basic elements of a monthly mortgage payment. Your payments of principal and interest go toward repaying the loan.

What are the 4 elements of a mortgage? ›

Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance. If you've never owned a home before, you may be surprised that a mortgage payment has that many components. By including these costs in one monthly payment, your lender helps make things easier for you.

What is the most common type of mortgage loan? ›

1. Conventional loan. Conventional loans, the most popular type of mortgage, come in two flavors: conforming and non-conforming. Conforming loans: A conforming loan “conforms” to a set of Federal Housing Finance Agency (FHFA) standards, including guidelines around credit, debt and loan size.

What is the most commonly used type of mortgage nowadays? ›

Below we go into detail about the most common types of mortgage.
  • Fixed rate mortgages. With a fixed rate mortgage, you will pay a set rate of interest for a certain number of years. ...
  • Tracker mortgages. ...
  • Standard variable rate. ...
  • Discounted mortgages. ...
  • Interest-only mortgages.

Which type of mortgage does not require a down payment? ›

Government-backed USDA and VA loans can allow you to buy a home with $0 down. The fact that these loans are backed by the federal government allows lenders to be more lenient with down payment requirements.

Which type of loan is the cheapest? ›

Generally, secured loans tend to have lower interest rates compared to unsecured loans because they are backed by collateral. However, if you do not want to pledge any of your assets as collateral to the lender, then unsecured loans like personal loan is the best financing option.

What is the hardest type of loan to get? ›

The type of loan that tends to be most difficult to get from a bank is a business loan. Banks typically have stricter requirements and higher standards when it comes to granting business loans. They often require a proven track record of financial stability, detailed business plans, and collateral to secure the loan.

What is a gold loan? ›

Gold loan (also called loan against gold) is a secured loan taken by the borrower from a lender by pledging their gold articles (within a range of 18-24 carats) as collateral. The loan amount provided is a certain percentage of the gold, typically upto 80%, based on the current market value and quality of gold.

What type of mortgage has the lowest down payment? ›

FHA Loans. Federal Housing Administration (FHA) loans provide financing with down payment options as low as 3.5%.

What are the three main types of mortgages? ›

When purchasing a house, there are three main types of mortgages to choose from: fixed-rate, conventional, and standard adjustable rate. All have different benefits and shortcomings that assist various homebuyer profiles.

What is the best mortgage type? ›

Fixed-rate mortgages have a set interest rate for the life of the loan, usually from 10 to 30 years. If you want to pay off your home faster and can afford a higher monthly payment, a shorter-term fixed-rate loan (say, 15 or 20 years) will save you interest over the long term.

What are mortgages classified? ›

The main types of mortgages are conventional loans, government-backed loans, jumbo loans, fixed-rate loans and adjustable-rate loans. There are other types of mortgages for various purposes, such as building or renovating a home or investing in property.

What is the most commonly used mortgage? ›

Below we go into detail about the most common types of mortgage.
  • Fixed rate mortgages. With a fixed rate mortgage, you will pay a set rate of interest for a certain number of years. ...
  • Tracker mortgages. ...
  • Standard variable rate. ...
  • Discounted mortgages. ...
  • Interest-only mortgages.

What are the 4 parts of a mortgage? ›

Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance. Making one payment to cover all four parts means you only have to remember one due date.

How many mortgage terms are there? ›

The term of your mortgage loan is how long you have to repay the loan. For most types of homes, mortgage terms are typically 15, 20 or 30 years. Explore loan term options. An origination fee is what the lender charges the borrower for making the mortgage loan.

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