Types of Mortgage Loans for Homebuyers: The Complete Guide

Are you in the market for a new home? There are many different types of mortgage loans available, and it can be difficult to decide which one is right for you. In this blog post, we will discuss all of the different types of mortgage loans available to homebuyers. We will also provide a guide on how to choose the right loan for your needs.

Conventional Loan

A conventional loan is a product offered by banks and other lenders that is not insured by the federal government. Because of this, conventional loans are sometimes also called "non-GSE loans," with GSE referring to government-sponsored enterprises like Freddie Mac and Fannie Mae. Because they are not backed by the government, conventional loans present a higher risk to the lender than do government-insured loans. In order to make up for this increased risk, borrowers who take out a conventional loan usually pay a higher interest rate than those who take out a government-insured loan. 

Additionally, conventional loans typically require the borrower to have a higher credit score than is necessary for a government-insured loan. For these reasons, borrowers who might otherwise be eligible for a government-insured loan often choose a conventional loan instead in order to get a lower interest rate. This can be a risky decision, as defaulting on a conventional loan can lead to the loss of the property purchased with the loan; however, for borrowers who are confident in their ability to make their payments on time, taking out a conventional loan can be an excellent way to save money on interest payments over the life of the loan.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage, or ARM, is a type of mortgage that has an interest rate that changes over time. The initial interest rate is usually lower than that of a fixed-rate mortgage, but it can increase – often significantly – after a set period of time. For this reason, ARMs are often referred to as “teaser” or “fluctuating” mortgages. While an ARM may be ideal for some homebuyers, others may find that the uncertainty of the monthly payments makes it too risky. Before choosing an ARM, it’s important to understand how they work and what the potential risks are.

There are a variety of mortgage loan options available to homebuyers. The best type of loan for you will depend on your individual circumstances and financial goals. Be sure to work with a lender who can help you understand the pros and cons of each type of loan before making a decision. With the right loan, you can enjoy the benefits of homeownership while keeping your monthly payments affordable.

Government-Insured Loan

A government-insured loan is a mortgage that is backed by the federal government. This type of loan is also sometimes referred to as a "guaranteed" loan because it is guaranteed by the government. The government agency that insures these loans is the Federal Housing Administration (FHA). Government-insured loans are available for both purchase and refinance transactions. Because the government is guaranteeing the loan, lenders are able to offer more favorable terms, such as low down payments and more lenient credit standards. As a result, government-insured loans can be a great option for borrowers who might not otherwise qualify for a mortgage.

Fixed-Rate Mortgage

A fixed-rate mortgage is a loan in which the interest rate remains the same for the entire term of the loan. The advantage of a fixed-rate mortgage is that it protects the borrower from rising interest rates. The monthly payments remain constant, even if interest rates rise. This can be helpful for budgeting purposes, as the borrower knows exactly how much they will need to pay each month. The downside of a fixed-rate mortgage is that it offers no flexibility if interest rates fall. borrowers who took out a fixed-rate mortgage when rates were high may find themselves stuck with an un advantageous loan when rates decline. Overall, a fixed-rate mortgage can be a good choice for borrowers who are looking for stability and predictability in their monthly payments.

Jumbo Loan

A jumbo loan, also known as a non-conforming loan, is a mortgage loan that exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA). Conforming loan limits are standard loan limits established by government-sponsored enterprises Fannie Mae and Freddie Mac and are generally $510,400 for a single-family home. Jumbo loans are available in both fixed-rate and adjustable-rate mortgage options. Because jumbo loans exceed the maximum amount that can be backed by government-sponsored entities, they may pose more risk to lenders and often come with higher interest rates than conforming loans.

Borrowers of jumbo loans typically have strong credit histories and ample assets to help offset the increased risk to lenders. Jumbo loans are available for primary homes, secondary homes, and investment properties but are not backed by government agencies, making them more difficult to obtain than other types of loans.