What types of mortgages are available?
Different kinds of mortgages fit different financing needs. Mortgage loans can be categorized several different ways.
Fixed-Rate vs. Adjustable-Rate Loans
Generally, loans can fall into two categories, fixed-rate and adjustable rate mortgages (ARM). The chart below compares these options. Within those categories, loans are also issued for a specific term, or number of years. Your monthly payments are structured so that you can pay off your loan within that time period.
Government vs. Conventional Loans
Unlike conventional loans, government secured loans are backed by a federal agency, like the Federal Housing Administration or U.S. Dept. of Veterans Affairs. These loans are insured by the government to protect the lender in case of default. They generally offer lower interest rates and down payment requirements. However, they do have specific eligibility requirements. For example, VA loans are only available to Veterans, and FHA loans have loan amount restrictions based on county of residence; you typically don’t see these restrictions with conventional loans.
Conforming vs. Jumbo Loans
Conventional mortgages are classified as conforming when the loan amount is less than or equal to $417,000 (single unit residential). Loans greater than this amount are considered jumbo loans. Jumbo loans often come with higher interest rates, larger down payment requirements and more stringent qualifying guidelines.
Loans with or without Mortgage Insurance
If you make a down payment of less than 20 percent of your home’s purchase price, most lenders will require you to pay some type of mortgage insurance (MI) premium. Costs may vary based on the type of loan, your credit profile and the actual down payment amount. MI is usually calculated as a percentage of the total loan amount and is typically added directly to your monthly loan payment. However, certain programs allow you to finance MI into the loan, paying a one-time upfront payment or accepting a higher interest rate in lieu of monthly payments. Depending on the type of loan, MI payments may continue for the life of the loan or last for a specified duration.
Although there are several different types of mortgage options, the most common ones among consumers are fixed rate and adjustable rate. Here’s how they differ: