What are the different types of mortgage loans available?

Before buying a home or refinancing, it's important to compare mortgage types. (iStock)

When buying a home or refinancing one you already own, securing a lower interest rate is just one of many factors to consider. Really, it's picking the right type of mortgage loan that's crucial.

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Homebuyers, in particular, will hear terms like "fixed rates," "adjustable rates," "jumbo loans" and others. It's important to be able to decipher each loan type before making any major decisions

Getting to know different mortgage types and comparing mortgage and refinance rates from multiple lenders can help you find the home loan that best fits your needs and budget. Click here to learn more about each loan type and how to secure a lower interest rate today.

Here are 8 types of loans you should know to help determine which is best for you:

  1. 30-year fixed-rate
  2. 15- or 20-year fixed-rate
  3. Adjustable-rate mortgage (ARM)
  4. FHA loan
  5. USDA loan
  6. VA loan
  7. Interest-only loan
  8. Jumbo mortgage

1. 30-year fixed-rate

These home loans have mortgage rates that remain the same for the entire 30-year term.

30-year fixed-rate mortgage advantages:

  • Can be used for a home purchase, mortgage refinance, cash-out refinance, or home equity loan
  • Monthly payments are stable and you can accelerate your loan payoff by making additional principal payments
  • Interest rates won't change, making it easier to calculate total interest paid

30-year fixed-rate mortgage disadvantages:

  • Mortgage rates may be higher compared to shorter-term home loans
  • Building equity can take time

Best for: Homebuyers and refinance borrowers who want predictable monthly payments. Using a mortgage calculator can help to estimate your payment.

If you already have a 30-year fixed-rate mortgage, you may want to consider refinancing to a shorter term. To see how much you could save on your monthly payments and life of the loan, crunch the numbers and compare loan rates and mortgage lenders using this free tool.

WHAT'S THE LOWEST RATE EVER FOR A 30-YEAR FIXED MORTGAGE?

2. 15- or 20-year fixed-rate

A 15- or 20-year fixed-rate mortgage allows a shorter window for repaying your mortgage.

15- or 20-year fixed-rate mortgage advantages:

  • A popular option for refinance loans
  • May offer lower interest rates compared to 30-year fixed-rate mortgages
  • It's possible to build equity faster with a shorter loan term
  • You can be mortgage debt-free in less time

15- or 20-year fixed-rate mortgage disadvantages:

  • A shorter loan term can result in a higher monthly payment
  • Higher payments could shrink how much home you can afford when buying

Best for: Homebuyers and refinance borrowers who are comfortable with supporting a higher monthly mortgage payment and want to pay off their home loan faster.

If you’ve decided that refinancing your home loan is right for you, visit Credible to find personalized rates and lenders all in one place.

HOW TO FIND THE BEST MORTGAGE RATES AND FASTEST CLOSINGS

3. Adjustable-rate mortgage (ARM)

Adjustable-rate mortgages or ARM loans have a low fixed rate for an initial period. Once that period ends, the rate adjusts based on an underlying index rate.

Adjustable-rate mortgage advantages:

  • Monthly payments can be lower than other mortgage types initially owing to lower mortgage rates
  • Depending on the loan terms, you can take advantage of a low initial rate for 5, 7, or 10 years

Adjustable-rate mortgage disadvantages:

  • You could be stuck with a much higher rate once your loan adjusts
  • Higher mortgage rates can translate to higher monthly payments

Best for: Homebuyers who don't plan to stay in the home long-term or will refinance to a fixed-rate mortgage before their ARM adjusts.

If you'd like to learn more about the different types of home loans available now, visit Credible.

HOW YOU COULD BENEFIT FROM ADJUSTABLE-RATE MORTGAGES

4. Federal Housing Administration (FHA) loan

FHA loans are backed by the Federal Housing Administration. These government-backed loans can be used to buy a home or to refinance an existing FHA loan.

FHA loan advantages:

  • Buy a home with as little as 3.5% down, versus the 10% or 20% down payment that may be expected with a conventional home loan
  • Minimum credit score requirements are also lower for FHA loans versus other mortgage options
  • Designed to make homeownership easier to attain for first-time buyers 

FHA loan disadvantages:

  • Homes must meet minimum health and safety standards
  • FHA loans have lower loan limits than other mortgage types
  • Mortgage insurance premiums are required

Best for: First-time buyers with less than perfect credit who are in the low-to-moderate-income range and want to buy a home with a smaller down payment.

If you're a first-time homebuyer, make sure you check Credible to view all of your loan options before making a commitment. After all, Credible can help you determine the life of the loan you'll need and what kind of mortgage rates are currently available.

MORTGAGE RATES NEAR RECORD LOW  — WHY IT'S A GOOD TIME TO REFINANCE

5. USDA loan

USDA loans are another type of government-backed loan. The Department of Agriculture offers these home loans to eligible buyers living in qualifying rural areas.

USDA loan advantages:

  • It's possible to get up to 100% financing with no down payment required
  • Mortgage rates for USDA loans are competitive
  • No prepayment penalties apply and the seller can pay some of your closing costs

USDA loan disadvantages:

  • Homes have to be located in an eligible rural or suburban area
  • Your income can't exceed certain limits to qualify for a USDA loan
  • USDA loans also cap the number of assets you can have to qualify

Best for: Low-income borrowers who live in rural areas and want to buy a home with low or zero down payment requirements.

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6. VA loan

VA loans are designed for military members and veterans. These government loans are backed by the U.S. Department of Veterans Affairs.

VA loan advantages:

  • No down payment is required for a VA loan
  • Private mortgage insurance isn't required
  • The Department of Veterans Affairs doesn't set a minimum credit score requirement for VA loans

VA loan disadvantages:

  • Lenders can still impose minimum credit score guidelines
  • An upfront VA loan funding fee is required
  • Similar to FHA loans, homes have to meet certain health and safety requirements

Best for: Military members, veterans and their families who want to purchase or refinance a home at competitive rates with no down payment requirement.

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7. Interest-only loan

Interest-only loans only require you to make payments toward the interest on the loan for an initial period. Principal payments are required later.

Interest-only loan advantages:

  • You can defer making payments on the loan principal
  • Available for home purchase loans and home equity loans

Interest-only loan disadvantages:

  • Interest rates may be higher compared to conventional mortgages
  • You may have to make a large balloon payment once the interest-only repayment period ends

Best for: Borrowers who are taking out home equity loans or home purchase loans that they can afford to pay off quickly or plan to refinance later.

Don't want to wait to refinance? View your mortgage refinance options today via Credible.

HOW REFINANCING YOUR MORTGAGE CAN PUT MONEY BACK IN YOUR POCKET

8. Jumbo mortgage

Jumbo mortgages are home loans that have limits above the conforming loan limits as set by Fannie Mae and Freddie Mac. These limits can vary and are adjusted regularly to account for inflation.

Jumbo mortgage advantages:

  • They can make it easier to buy a more expensive home without having to get a piggyback mortgage
  • You can get a fixed-rate or adjustable-rate jumbo loan
  • Mortgage rates can be competitive and sometimes lower than conventional loans

Jumbo mortgage disadvantages:

  • Lenders may expect good to excellent credit to qualify
  • You may need a larger down payment or more cash reserves to be approved

Best for: People who need a mortgage for a more expensive home. Buyers who have good credit and are able to support a larger down payment and a higher monthly payment.

When comparing mortgage types, it helps to get advice from a qualified mortgage professional. Connect with Credible today to review mortgage rates from different lenders and speak to a loan expert.

REFINANCE YOUR MORTGAGE BEFORE RECORD LOW RATES DISAPPEAR