Financial Education Series

Mortgage Types Explained

Navigating Your Home Financing Options

Choosing the right mortgage can save you thousands of dollars over the life of your loan. Understanding the different types of mortgages available will help you make the best decision for your financial situation and homeownership goals.

Why This Matters

A mortgage is likely the largest debt you'll ever take on. The type you choose affects your monthly payment, total interest paid, and how long you'll be making payments. Small differences in terms can have big financial impacts.

Conventional Mortgage Types

Fixed-Rate Mortgages

30-Year Fixed

The most common mortgage type with unchanging interest rates and monthly payments for the entire 30-year term.

Lower monthly paymentsHigher total interest

15-Year Fixed

Higher monthly payments but with substantial interest savings over the life of the loan and faster equity building.

Higher monthly paymentsLower total interest

20-Year Fixed

A middle ground between 15 and 30-year terms, offering a balance of monthly payment size and interest paid.

Adjustable-Rate Mortgages (ARMs)

5/1 ARM

Fixed rate for the first 5 years, then adjusts annually based on market rates. Often starts with lower rates than fixed-rate mortgages.

7/1 and 10/1 ARMs

Similar to 5/1 ARMs but with longer initial fixed periods of 7 or 10 years before adjustments begin.

ARM Caps

Limits on how much rates can increase in a single adjustment, annually, and over the life of the loan.

Initial cap (first adjustment)Periodic cap (each adjustment)Lifetime cap (total increase)

Government-Backed Loans

Special Program Mortgages

FHA Loans

Backed by the Federal Housing Administration, these loans are designed for borrowers with lower credit scores or smaller down payments (as low as 3.5%).

Lower down paymentMortgage insurance requiredMore flexible credit requirements

VA Loans

Available to eligible veterans, active duty service members, and some military spouses. Guaranteed by the Department of Veterans Affairs.

No down payment requiredNo mortgage insuranceCompetitive interest rates

USDA Loans

Designed for rural and some suburban homebuyers with moderate to low incomes. Guaranteed by the U.S. Department of Agriculture.

No down payment requiredLower-than-average feesGeographic and income restrictions

Special Mortgage Types

Alternative Options

Jumbo Loans

Loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. Generally require larger down payments and excellent credit.

Interest-Only Mortgages

Allow payment of only interest for a specified period, followed by larger payments covering principal and interest.

Balloon Mortgages

Feature smaller monthly payments but require a large lump-sum payment at the end of a short loan term.

Refinancing Options

Rate-and-Term Refinance

Replaces your existing mortgage with a new one that has a different interest rate, term, or both.

Cash-Out Refinance

Allows you to borrow more than you currently owe and receive the difference in cash.

Streamline Refinance

Simplified refinancing process for existing FHA or VA loans with reduced paperwork and faster processing.

Choosing the Right Mortgage

Decision Factors

Consider a Fixed-Rate Mortgage If:

You plan to stay in your home for many years

You prefer stable, predictable payments

Current interest rates are low

You have a steady, reliable income

Consider an ARM If:

You plan to move or refinance within a few years

Current interest rates are high and expected to fall

You want lower initial payments to qualify for a larger loan

You expect your income to increase over time

This content is educational in nature and updated as of March 2024. We aim to relay factual financial information, similar to how a newspaper would report market data. For complete information about our services, please review our Terms of Service.