There are many different types of mortgages, broadly put into three buckets: conventional, government-insured and jumbo loans, also known as non-conforming mortgages. There are also different loan terms within these categories, such as 15 years or 30 years, and different interest rate structures, generally either fixed or adjustable (also known as variable).
Conventional mortgages
Conventional loans are often ultimately bought by Fannie Mae or Freddie Mac, the big government-sponsored enterprises (GSEs) that play an important role in the mortgage lending market. They are offered by virtually every type of mortgage lender, with some programs allowing for a down payment as low as 3 percent. A conventional loan can be either conforming or nonconforming; the conforming loans are the ones backed by the GSEs.
Government-insured mortgages
FHA loans, VA loans, USDA loans
Government-insured or government-backed loans are backed by three agencies: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans). The U.S. government isn’t a mortgage lender, but it sets the basic guidelines for each loan type offered through private lenders. Government-backed loans can be good options for first-time homebuyers as well as borrowers who have a lower down payment or smaller budget. The requirements are usually looser than those for mortgages not secured by the government (conventional mortgages). The interest rates on FHA, VA and USDA loans are usually similar to those on conventional mortgages, but fees and other costs are higher.
Non-conforming mortgages
Jumbo mortgages
Jumbo mortgages are loans that exceed federal loan limits for conforming loan amounts. For 2023, the maximum conforming loan limit for single-family homes in most of the U.S. is $726,200, and $1,089,300 in more expensive locales. Jumbo loans are more common in higher-cost areas and generally require more in-depth documentation to qualify. Jumbo loans are also a bit more expensive than conforming loans.
Fixed-rate mortgages
A fixed-rate mortgage has an interest rate that doesn’t change throughout the life of the loan. In that way, borrowers are not exposed to rate fluctuations. For example, if you have a fixed-rate mortgage with a 6.8 percent interest rate and prevailing rates shoot up the next week, year or decade, your interest rate is locked in, so you don’t ever have to worry about paying more. Of course, if rates fall, you’ll be stuck with your higher rate unless you refinance. There are many types of fixed-rate mortgages, such as 15-year fixed-rate, jumbo fixed-rate and 30-year fixed-rate mortgages.
Adjustable-rate mortgages
Adjustable-rate mortgages, or ARMs, have an initial fixed-rate period during which the interest rate doesn’t change, followed by a longer period during which the rate might change at preset intervals. Unlike a fixed-rate mortgage, ARMs are affected by market fluctuations, so if rates drop, your mortgage payments will drop. However, the reverse is also true: When rates rise, your monthly payments will also rise. Generally, ARM rates are lower to start than with fixed-rate mortgages, but since they’re not locked into a set rate, you won’t be able to predict future monthly payments. ARMs do come with an interest rate cap, however, above which your loan cannot rise.
Compare fixed-rate vs. adjustable-rate mortgages.
Source: thesimpledollar.com