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Video — Common Mortgage Options Made Simple

86.5 seconds

This short video summarizes the main kinds of mortgages available for home buyers:

Adjustable Rate Mortgage, commonly called “ARM”

Fixed-Rate Mortgages

Balloon Mortgages

2-Step Mortgages

ARMs, as the name suggests, will change over time. As market interest rates vary, the mortgage interest rates and payments will vary with them. Buyers opting for ARM loans take on responsibility for meeting payments even if interest rates go up significantly.

Fixed rate mortgages lock in interest rates for the entire loan. If the interest rate on a fixed-rate loan is higher than an ARM today, the rate and payments will not change in the years to come.

Balloon mortgages are sort of “shaped like a balloon” — smaller at the bottom, bigger at the top. In financial terms, balloon mortgages provider lower interest rates for the early years of a loan — usually 5 years, 7 years, or 10 years. Then the balance and interest are adjusted and refinanced, which sometimes requires a large ‘balloon’ payment.

Two-Step mortgages are like super-simplified ARMs. Interest rates adjust, but only one time.

Other options for mortgages are available, and worth investigating for your particular situation. For veterans, VA loans are a frequently a great option; see the VA loan series on this site for additional details. Other government programs for non-veterans may also be available.

Real estate professionals and lenders can help you make sense of the current market and the options that might suit you best.

The 5 Common Mortgage Loans

There are 5 kinds of mortgage loans available to people who want to buy a home.

It's possible that buying a new house will be one of the most expensive things you ever do. Before you start looking for the perfect home to buy, you should look into the different mortgage options you have if you plan to finance the purchase.

But not every type of mortgage works the same way. So, doing research before you move forward can help you choose the option that is best for your current financial situation, which could mean keeping more money in your pocket. When you fill out the application, you'll also know what to expect in terms of the rules that will be followed.

Common Mortgage Options

  • People with good credit histories are the best candidates for conventional loans.
  • People with good credit who want to buy an expensive home are the best candidates for a jumbo loan.
  • If you have bad credit and don't have much money for a down payment, the best option is to get a loan that is backed by the government.
  • Fixed-rate mortgages are the best choice for people who want to make the same amount each month for the whole life of the loan.
  • Borrowers who don't plan to stay in the home for a long time, want lower payments in the short term, and don't mind the possibility of having to pay more in the future should think about getting an adjustable-rate mortgage.

1. Conventional loan

  • Conventional loans, which are not backed by the federal government of the United States, can either follow certain rules or break from those rules.
  • Conforming loans are loans that meet the standards set by the industry. As the name suggests, a conforming loan "fits" the set of rules that the Federal Housing Finance Agency has set up (FHFA). These rules cover things like credit, debt, and the size of the loan. In most places, the most a person can borrow with a conforming loan in 2023 is $726,200, but in high-cost areas, the most they can borrow is $1,089,300.
  • Loans that don't fit the rules - The FHFA has rules about loans, and these don't meet them. Instead, they focus on people who want to buy more expensive homes or who have credit profiles that aren't like most people's.

The benefits of using conventional loans

  • Can be used as a primary home, a second home, or an investment property.
  • Even if the interest rate is a little higher, the overall cost of borrowing is usually less with an adjustable-rate mortgage than with other types.
  • Once your home is worth 20% more than what you owe on it, you can either ask your lender to cancel your private mortgage insurance (PMI) or refinance to get rid of it.
  • On loans that are backed by Fannie Mae or Freddie Mac, borrowers can pay as little as a 3% down payment.
  • The seller may pay for some or all of the closing costs.

Conventional loan drawbacks.

  • Most of the time, you need a FICO score of 620 or higher (the same applies for refinancing)
  • a bigger down payment is needed than with some government loans.
  • All applicants must have a ratio of debt to income (DTI) of no more than 43%. (50 percent in some instances)
  • If your down payment is less than 20% of the home's value, you will probably have to pay private mortgage insurance (PMI).
  • There are a lot of papers that need to be shown to prove a job, income, assets, and a down payment.

Who is best suited for conventional loans?

If you have a good credit score and can put down a lot of money, a traditional mortgage is probably your best option. By far, most homebuyers choose a conventional mortgage with a 30-year term and a fixed interest rate.

2. Jumbo loan

The FHFA sets limits on how much you can borrow, and jumbo mortgages are home loans that go over those limits. People tend to use jumbo loans more in places where housing costs are higher, like New York City, Los Angeles, San Francisco, and Hawaii, where home values tend to be higher.

The good things about jumbo loans

  • Have the option to borrow more money, which lets them buy a home that costs more.
  • Most of the time, the interest rates on jumbo loans are the same as those on regular loans.
  • It's possible that this is the only option for some people who want to buy a home but live in places with very high home prices.

Bad things about jumbo loans

  • Most of the time, a deposit of at least 10 to 20 percent is needed, depending on the situation.
  • In general, you need to have a FICO score of 700 or higher.
  • A DTI ratio of more than 45 percent is not good enough.
  • You must show proof that you have a lot of money or savings in the form of cash or savings accounts.
  • Usually require a large number of supporting documents to be eligible.

Who are the best candidates for jumbo loans?

If you want to finance a property whose selling price is higher than the most recent conforming loan limits set by the government, a jumbo loan is probably your best option.

3. A loan that the government will back.

Even though the federal government of the United States is not in the business of giving out mortgage loans, it does help more people become homeowners. Mortgages are backed by the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), and the United States Department of Veterans Affairs (VA) (VA).

  • FHA loans - The FHA backs these home loans, and the interest rates are competitive. They make homeownership possible for people who don't have a lot of money saved up for a down payment or perfect credit, and they have other benefits as well. To get the maximum 96.5 percent FHA loan with only a 3.5 percent down payment, your credit score must be at least 580 on the FICO scale. But you can get away with a score as low as 500 if you put down at least 10% of the total amount. The fact that borrowers of FHA loans have to pay two separate mortgage insurance premiums adds to the overall cost of the loan. Last but not least, with an FHA loan, the seller may have to pay some of the closing costs.


  • USDA loans USDA loans are available to people with incomes ranging from moderate to low, as long as they meet certain income requirements and plan to buy a home in a rural area where USDA funding is available. Some USDA loans are available to people who don't have to make a down payment. There are, however, other costs, such as an upfront fee equal to 1% of the loan amount and an annual fee. The upfront fee is often financed with the loan. With the loan, you can pay for both of these costs.

  • Under the VA loans program, members of the U.S. military (both active duty and veterans) and their families can get mortgages with flexible terms and low interest rates. There are no minimum requirements for a down payment, mortgage insurance, or credit score, and closing costs are usually capped and may be paid by the seller. For VA loans, the financing fee, which is a percentage of the loan amount, must be paid in full at the time of closing, or it can be added to the overall cost of the loan along with any other closing fees.

What are the benefits of loans that the government backs?

  • To help you finance a home purchase when you don't meet the requirements for a conventional loan
  • Credit requirements more flexible
  • There is no need to put down a big amount at first.
  • Accessible to both returning and new customers.
  • VA loans don't need mortgage insurance, and you don't have to put anything down.

Bad things about loans that the government guarantees

  • Mortgage insurance premiums that are required for FHA loans but can be skipped if the loan is refinanced into a conventional mortgage.
  • Most of the time, the maximum loan amounts for FHA loans are lower than those for traditional mortgages. This limits the number of options available.
  • Borrower must continue to live in the property (although you may be able to finance a multi-unit building and rent out other units)
  • Would lead to higher costs of borrowing in general
  • You should be ready to show more proof that you qualify for the loan to show that you should get it.

Who should consider government-backed loans?

You might have trouble getting a conventional loan if you have bad credit or if you only have a small amount of cash saved for a down payment. There is a chance that loans backed by the FHA and the USDA could be an option. Most of the time, VA-backed loans are better than regular loans for military members, veterans, and spouses who meet the requirements.

4. A mortgage with a fixed rate of interest

The amount that must be paid each month to pay off a fixed-rate mortgage doesn't change because the interest rate stays the same over the life of the loan. Fixed-rate loans usually have terms of between 15 and 30 years, but some lenders let borrowers choose any term from 8 to 30 years.

Fixed-rate mortgages have a lot of pros.

  • The interest and principal payments on a loan are always the same amount each month, no matter how long the loan is.
  • Costs for housing are easier to plan for and budget for from one month to the next.

Fixed-rate mortgages have a few cons.

  • If interest rates go down, you'll need to look for a new loan to take advantage of the lower rate.
  • Fixed-rate mortgages usually have higher interest rates than adjustable-rate mortgages (ARMs)

Who should get a mortgage with a fixed rate of interest?

A fixed-rate mortgage is a good choice for people who plan to stay in their current home for at least five to seven years and don't want their regular mortgage payments to change.

5. Adjustable-rate mortgage (ARM)

The interest rates on adjustable-rate mortgages (ARMs) go up and down with changes in the market. This makes them less predictable than loans with fixed rates. Many ARM products have a fixed interest rate for the first few years of the loan's term. After that, the rate changes to a variable rate that stays in place for the rest of the loan's term. For example, you might find an adjustable-rate mortgage (ARM) with a term of 7 years and an adjustment period of 6 months. This says that your rate won't change for the first seven years of the loan. After that, it will change every six months. If you are thinking about getting an adjustable rate mortgage (ARM), you must read the fine print of the introductory period so that you know how much your interest rate could go up and how much you could end up paying overall once the introductory period is over.

The good things about ARMs

  • A lower fixed rate for the first few years of being a homeowner. This isn't always the case, though. Lately, 30-year fixed rates have been about the same as those for 5/6 adjustable-rate mortgages.
  • Can bring down costs significantly by lowering interest payments

The Bad Things About ARMs

  • Monthly mortgage payments may become too much to handle, which could cause the borrower to stop making payments on the loan.
  • In a few years, home prices could drop, making it harder to sell or refinance the property before the loan's reset date.

Who gets the most out of ARMs?

If you don't plan to live in your current home for more than a few years, an adjustable rate mortgage (ARM) could help you save money on interest payments. If you decide to stay in the home even though your monthly payments might go up, you must be willing to deal with a certain amount of financial uncertainty.

Other Types of Mortgages

When looking for a loan, you might come across other types of mortgages besides these common ones, such as the ones below:

Construction loans

If you want to build a house from the ground up, you might want to get a construction loan. You can choose between getting a separate construction loan for the project and a separate mortgage to pay off the debt. There is also the option of getting a construction-to-permanent loan, which is a type of loan that combines the costs of financing and building into one loan. Most of the time, you will also have to show that you can pay the required monthly amount and make a larger initial payment.

Interest-Only

In a mortgage with interest-only payments, the borrower pays only the interest for a certain amount of time, usually between five and seven years, and then starts paying both the interest and the principle. But since you'd only have to pay the interest on an interest-only mortgage at first for a set amount of time, you won't be able to build up equity in your home as quickly. But these loans work best for people who are sure they can sell or refinance their property or who have a good chance of being able to afford a higher monthly payment in the future.

Piggyback loans

A piggyback loan, also called an 80/10/10 loan, is actually made up of two separate loans. The first loan pays for 80% of the property's purchase price, and the second loan pays for the remaining 10%. As a down payment, you will make a payment equal to the last 10%. If the borrower gets one of these loan packages, they won't have to pay for mortgage insurance. This will save them money. Even though not having to pay PMI may sound appealing, keep in mind that piggyback loans have two different sets of closing costs, and you will also pay interest on two separate loans. Do the math to see if the money you're saving with this unusual plan is enough to keep it up.

Mortgages with balloon payments

There is also a type of home loan called a "balloon mortgage." At the end of the loan period, there is a big payment to be made on this mortgage. Most of the time, you'll have to make payments based on a 30-year term, but you'll only have to do that for a very short time, like seven years. When the loan period is over, you will have to make a large payment on the remaining balance. This payment could become too much for you to handle if you haven't saved enough for it or if your credit gets worse. Using the balloon mortgage calculator from Bankrate, you can figure out if a loan with a balloon payment is in your best interest.

Here's how to get a mortgage for your house:

Now that you know what kind of loan would best fit your needs for buying a home, it's time to find the right mortgage lender to make your home purchase happen. Different lenders may have very different terms and conditions, so it is important to do some research and compare lenders before choosing one. When it comes to mortgage firms, you have a lot of options, from traditional brick-and-mortar banks and credit unions to companies that only do business online. Follow this advice and read lender reviews. This will help you find the best lender.

Author
Marco Giordano
Writer, Researcher & Video Editor
January 27, 2023
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