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Buying a home is one of the biggest financial decisions you can make. With so many mortgage options out there, it can get overwhelming trying to figure out which type of home loan is right for you.
As a first-time homebuyer, I remember feeling confused by all the different types of mortgages Fixed-rate? Adjustable-rate? VA loan? Conventional loan? The terminology felt like a foreign language.
After doing extensive research, I realized there are 5 main types of mortgage loans, each with their own pros and cons. To help simplify the process, I created this comprehensive comparison chart breaking down the key differences between conventional loans, jumbo loans, government-backed loans, fixed-rate mortgages, and adjustable-rate mortgages (ARMs).
Conventional Loans
Conventional loans are the most common type of mortgage loan, making up 45.1% of mortgages originated in Q3 2023 according to data from the Urban Institute.
Best for: Homebuyers with good credit looking to buy a home within conforming loan limits. Conforming loans adhere to lending standards set by Fannie Mae and Freddie Mac.
Pros:
- Available from most lenders
- Can be used to finance primary residences, second homes, vacation properties, and investment properties
- Only requires 3% down payment on fixed-rate conforming loans
Cons:
- Require a minimum credit score of 620
- Stricter debt-to-income ratio limits compared to government-backed loans
- Must pay private mortgage insurance if less than 20% down
Loan Terms:
- Down payment: 3%
- Fixed-rate available: Yes
- Adjustable-rate available: Yes
- Loan terms: 10, 15, 20, 30 years
Jumbo Loans
Jumbo loans exceed the maximum conforming loan limits set by the Federal Housing Finance Agency. In 2024, the conforming limit is $766,550, or $1,149,825 in high-cost areas.
Best for: Homebuyers with strong credit looking to purchase more expensive properties that require loan amounts over conforming limits.
Pros:
- Finance pricier homes
- Competitive interest rates on par with conforming loans
- Only option for purchasing homes in high-cost markets
Cons:
- Not offered by all lenders
- Require higher credit scores, usually 700+
- Larger down payments of 10-20%
Loan Terms:
- Down payment: 5%
- Fixed-rate available: Yes
- Adjustable-rate available: Yes
- Loan terms: 15, 20, 30 years
Government-Backed Loans
Government-backed loans are insured or guaranteed by government agencies like the FHA, VA, and USDA. They offer more flexible qualifying guidelines for borrowers who may not meet conventional loan requirements.
Types:
FHA loans – Insured by the Federal Housing Administration. Best for buyers with credit scores as low as 580 and minimal cash for a down payment.
VA loans – Guaranteed by the Department of Veterans Affairs. For eligible military members and spouses. $0 down payment required.
USDA loans – Guaranteed by the Department of Agriculture. For moderate-income buyers purchasing homes in rural areas.
Pros:
- More lenient credit score and down payment requirements
- Help buyers who may not qualify for conventional loans
Cons:
- Require mortgage insurance premiums and guarantee fees
- Loan amounts limited on FHA loans
- Specific eligibility requirements on VA and USDA loans
Loan Terms:
FHA Loan
- Down payment: 3.5%
- Fixed-rate available: Yes
- Loan terms: 15, 30 years
VA Loan
- Down payment: 0%
- Fixed-rate available: Yes
- Loan terms: 15, 30 years
Fixed-Rate Mortgages
Fixed-rate mortgages lock in a set interest rate for the entire repayment period. This provides payment stability since your monthly principal and interest payments remain the same over the life of the loan.
Best for: Homebuyers wanting predictable payments and planning to stay in the home long-term
Pros:
- Interest rate remains unchanged
- Fixed monthly payments
- Easy budgeting
Cons:
- Interest rates typically higher than adjustable-rate mortgages
- Must refinance to get lower rate
Loan Terms:
- Down payment: 3%
- Rate type: Fixed
- Loan terms: 10, 15, 20, 30 years
Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) have interest rates that fluctuate over the loan repayment period. The rate is fixed for an initial period before adjusting periodically. This allows for lower starting payments but the potential for higher future payments.
Best for: Homebuyers wanting lower initial payments and not planning to stay in home beyond 3-5 years. Also an option for buyers who can afford higher future payments.
Pros:
- Lower introductory interest rates
- Pay less in short run if rates fall
Cons:
- Risk of higher monthly payments when rates adjust
- Harder to budget with fluctuating payments
Loan Terms:
- Down payment: 3%
- Rate type: Adjustable
- Loan terms: 30 years
Other Types of Mortgage Loans
In addition to the main mortgage loan types, there are several other specialized loan programs for specific homebuyer needs:
- Construction loans – For financing new home construction
- Interest-only mortgages – Pay only interest in early years before higher payments kick in
- Piggyback loans – A first and second mortgage that helps borrowers avoid private mortgage insurance
- Balloon mortgages – Payments based on 30-year amortization with a balloon payment due at the 7 year mark
- Portfolio loans – Held on lender’s books so can offer more flexible underwriting
- Renovation loans – Combine home purchase and renovation into a single mortgage
- Physician loans – Specialized mortgages for doctors and medical professionals
- Non-QM loans – For borrowers who don’t meet standard underwriting criteria
The right mortgage product for you depends on your specific financial situation, credit profile, down payment amount, and plans for the home. I recommend speaking with a loan officer to discuss your homebuying goals and get pre-approved to see which loan programs you may qualify for.
Using this comparison chart as a starting point can help you narrow down the mortgage options most suitable for your needs. The home buying process can feel overwhelming, but arming yourself with knowledge about the various types of mortgages goes a long way in making an informed decision.
Adjustable-rate mortgage (ARM)
In contrast to fixed-rate loans, adjustable-rate mortgages (ARMs) come with interest rates that change over time. Typically with an ARM, you’ll get a lower, fixed introductory rate for a set period. After this period, the rate changes, either up or down, at predetermined intervals for the remainder of the loan term. A 5/6 ARM, for example, has a fixed rate for the first five years; the rate then increases or decreases based on economic conditions every six months until you pay it off. When your rate goes up, your monthly mortgage payment does as well, and vice versa.
- Lower introductory rates
- Could pay less over time if prevailing interest rates fall
- Ongoing risk of higher monthly payments
- Tougher to plan your budget as rate changes
If you don’t plan to stay in your home beyond a few years, an ARM could help you save on interest payments. However, it’s important to be comfortable with a certain level of risk that your payments might increase if you’re still in the home. Compare ARM loan rates.
Types of home loans
There are five main kinds of mortgages, each with their own benefits and features.
- Conventional loan: Best for borrowers with good credit scores
- Jumbo loan: Best for borrowers with good credit looking to buy a more expensive home
- Government-backed loan: Best for borrowers with lower credit scores and minimal cash for a down payment
- Fixed-rate mortgage: Best for borrowers who’d prefer a predictable, set monthly payment for the duration of the loan
- Adjustable-rate mortgage: Best for borrowers who aren’t planning to stay in the home for an extended period, prefer lower payments in the short term or are comfortable with possibly having to pay more in the future
Source: Urban Institute
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. When a conventional loan meets these standards, it’s eligible to be purchased by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that back much of the mortgage market.
- Non-conforming loans: These loans do not meet one or more of the FHFA’s standards. One of the most common types of non-conforming loan is a jumbo loan, a mortgage in an amount that exceeds the conforming loan limit. Non-conforming loans can’t be purchased by the GSEs, so they’re considered a riskier prospect for lenders.
- Available from the majority of lenders
- Can be used to finance primary residences, second or vacation homes and investment or rental properties
- Can put down as little as 3% for a conforming, fixed-rate loan
- Need a credit score of at least 620 to qualify
- Lower debt-to-income (DTI) ratio threshold compared to other types of mortgages
- Need to pay private mortgage insurance (PMI) premiums if putting less than 20% down
If you have a strong credit score and can afford to make a sizable down payment, a conventional mortgage is the best pick. The 30-year, fixed-rate option is the most popular choice for homebuyers. Compare conventional loan rates.
Jumbo mortgages are home loans in an amount that surpasses FHFA’s conforming loan limits. In 2024, that means any loan over $766,550, or $1,149,825 in higher-cost areas. Because these are bigger loans ineligible to be purchased by the GSEs, they can present more risk.
- Can finance a more expensive home
- Competitive interest rates, nowadays on par with those on conforming loans
- Often the only option in areas with high home values
- Not available with every lender
- Higher credit score requirement, often a minimum of 700
- Higher down payment requirement, often 10% to 20%
If you’re looking to finance a home with a purchase price exceeding the latest conforming loan limits, a jumbo loan is the best route. Compare jumbo loan rates.
The U.S. government isn’t a mortgage lender, but it does play a role in making homeownership accessible to more Americans by backing three main types of mortgages:
- FHA loans: Insured by the Federal Housing Administration (FHA), FHA loans can be had with a credit score as low as 580 and a 3.5 percent down payment, or a score as low as 500 with 10 percent down. FHA loans also require you to pay mortgage insurance premiums, adding to your costs. These premiums help the FHA insure lenders against borrowers who default. In addition, you can’t borrow as much money with an FHA loan; its ceiling is much lower than those on conventional conforming loans.
- VA loans: Guaranteed by the U.S. Department of Veterans Affairs (VA), VA loans are for eligible members of the U.S. military (active duty, veterans, National Guard and Reservists) as well as surviving spouses. There’s no minimum down payment, mortgage insurance or credit score requirement, but you’ll need to pay a funding fee ranging from 1.25 percent to 3.3 percent at closing.
- USDA loans: Guaranteed by the U.S. Department of Agriculture (USDA) loans help moderate- to low-income borrowers buy homes in rural, USDA-eligible areas. These loans don’t have a credit score or down payment requirement, but do charge guarantee fees.
- Much more flexible credit and down payment guidelines
- Help borrowers who wouldn’t otherwise qualify
- Additional cost for FHA mortgage insurance, VA funding fee and USDA guarantee fees
- Limited to borrowers buying a home priced within FHA loan limits or in a rural area, or servicemembers
If your credit or down payment prevents you from qualifying for a conventional loan, an FHA loan can be an attractive alternative. Likewise, if you’re buying a home in a rural area or are eligible for a VA loan, these options might be easier to qualify for. Compare FHA loan rates and VA loan rates.
Fixed-rate mortgages maintain the same interest rate over the life of your loan, which means your monthly mortgage payment (the loan principal and interest) always stays the same. Fixed loans typically come in terms of 15 years or 30 years, although some lenders offer flexible term lengths.
- Fixed monthly mortgage payment
- Easier to budget for
- Interest rates usually higher than introductory rates on adjustable-rate loans
- Need to refinance to get a lower rate
If you’re planning to stay in your home for some time and looking for the stability of a monthly payment that doesn’t change (notwithstanding homeowners insurance premium and property tax increases), a fixed-rate mortgage is right for you. Compare current mortgage rates.