3 Types of Mortgage Loans for Homebuyers

As a potential home buyer, it is equally important to research the different types of mortgage loans as it is the neighborhoods you might want to live in.

Applying for a home loan can be difficult, and knowing which type of mortgage best suits your needs will help guide you to the type of home you can afford. 

Depending on the type of mortgage you choose, you’ll have different requirements that alter your rate, the length of the loan, and your lender.

Selecting the right mortgage for your situation can lower your down payment and decrease the overall interest payment over the life of your loan.

Fixed rate

The fixed-rate mortgage is the most straightforward of your financing options. At the onset of the loan, the bank will offer you a specific interest rate and monthly payment.

That interest rate and payment will never change. It’s fixed.

The benefits of this mortgage type are its simplicity and its predictability. If you have a monthly budget, then it is reassuring to know that your continuing monthly expense for your home won’t change. 

Another major advantage is that a fixed-rate loan will allow you to continue enjoying that low-interest rate very far into the future. Even if interest rates rise, your loan will still be cheap.

Adjustable rate

The difference between a fixed-rate loan and an adjustable-rate loan is that the interest rate on an adjustable-rate loan will adjust over time. Typically adjustable-rate loans change every two, three, five, or seven years.

Banks will sometimes use a shorthand system to describe these loans. For example, an adjustable-rate loan that changes once every three years could be written as a “3/1 ARM.”

This stands for a three-year adjustable-rate mortgage.

For the first three years you have the loan, you will pay the same monthly payment every month based on your original interest rate. Then, when that three-year period ends, your monthly payment will change to another amount for the next three years to reflect the adjusted interest rate. 

In the same way, a “5/1 ARM” would be a five-year adjustable-rate mortgage where the rate changes once every five years. Your payment would also change once every five years with that change in interest rate.

Unconventional loans

Both the fixed-rate mortgage and adjustable-rate mortgage are considered conventional mortgages. That means they typically require a down payment of 10%-20%, and your financial situation must meet certain criteria to qualify for the loan.

For first-time home buyers, paying a 20% down payment may not be possible. In these cases, mortgage programs exist that don’t require larger down payments or include more lenient financial standards.

The two most common types of these programs are called FHA loans and VA loans

FHA stands for the Federal Housing Administration, and VA stands for the Department of Veterans Affairs.

In both of these loan programs, lower down payments and relaxed credit standards make it easier for first-time home buyers, veterans, or lower-income households to purchase a home.