Mortgage Types Compared

Overview of Mortgage Loan Types

Choosing the right mortgage is one of the most important financial decisions you'll make. Mortgage types differ in interest rate structure, down payment requirements, credit standards, and whether they're backed by the government. Understanding these differences can help you match a loan to your financial situation and long-term plans.

This guide compares the most common mortgage types: conventional, FHA, VA, USDA, and jumbo loans. We'll cover their key features, eligibility requirements, and trade-offs, then provide a side-by-side comparison to help you weigh your options.

Sources: Freddie Mac, Charles Schwab

Fixed-Rate Mortgages

A fixed-rate mortgage has an interest rate that remains constant for the life of the loan. This means your principal and interest payment stays the same each month, providing predictability and stability. Fixed-rate loans are typically best for borrowers who plan to stay in their home for the long term, often 10 years or more. Common terms include 30-year and 15-year fixed mortgages, though other lengths exist.

• Interest rate never changes.
• Monthly principal and interest payment is consistent.
• Ideal for long-term homeownership and budgeting.

Sources: Freddie Mac, Charles Schwab

Adjustable-Rate Mortgages (ARMs)

An adjustable-rate mortgage (ARM) features an interest rate that is fixed for an initial period and then adjusts periodically based on market conditions. ARMs typically start with a lower interest rate than fixed-rate mortgages, leading to lower initial monthly payments. However, after the initial fixed period, your rate can increase or decrease, affecting your payment amount.

Common ARM structures include 5/6 ARM (fixed for 5 years, adjusts every 6 months), 7/6 ARM, and 10/6 ARM. To limit how much your rate can change, ARMs have caps that restrict the rate adjustment at each change and over the life of the loan. These caps are important to understand before choosing an ARM.

• Initial rate is often lower than fixed-rate loans.
• Rate adjusts after a set period (e.g., 5, 7, or 10 years).
• Caps limit rate changes at each adjustment and over the loan term.

Sources: Freddie Mac, Charles Schwab

FHA Loans

FHA loans are insured by the Federal Housing Administration, which allows lenders to offer more flexible terms. FHA loans are popular among first-time homebuyers because they allow down payments as low as 3.5% for borrowers with credit scores of 580 or higher. Borrowers with credit scores between 500 and 579 may still qualify with a 10% down payment.

FHA loans require mortgage insurance premiums – both an upfront premium and an annual premium – regardless of your down payment amount. This adds to the total cost of the loan but is a trade-off for the lower down payment and credit flexibility.

• Down payment as low as 3.5% with a credit score of 580 or higher.
• Credit scores 500-579 may qualify with 10% down.
• Requires both upfront and annual mortgage insurance premiums.

Sources: CUSO Home Lending, LendingTree

VA Loans

VA loans are backed by the U.S. Department of Veterans Affairs and are available to eligible veterans, active-duty service members, and surviving spouses. One of the biggest benefits is that VA loans generally do not require a down payment and do not require private mortgage insurance. VA loans are also available as fixed-rate or adjustable-rate options, giving eligible borrowers flexibility.

While VA loans don't require a down payment, they do involve a funding fee (unless exempt). Specific eligibility requirements are set by the VA, and lenders may have their own credit standards (commonly around 620).

• 0% down payment required.
• No private mortgage insurance (PMI).
• Available to veterans, active-duty service members, and surviving spouses.

Sources: Freddie Mac, CUSO Home Lending, Scenic Community Credit Union

USDA Loans

USDA loans are backed by the U.S. Department of Agriculture and are designed for low- and moderate-income borrowers purchasing homes in eligible rural areas. A key benefit is that USDA loans do not require a down payment. They are available as fixed-rate loans and are intended to promote homeownership in less densely populated areas.

USDA loans do charge a guarantee fee, which acts like mortgage insurance. Eligibility is based on income limits and the property location.

• No down payment required.
• Backed by the USDA and limited to eligible rural areas.
• Requires a guarantee fee.

Sources: CUSO Home Lending, Scenic Community Credit Union

Jumbo Loans

Jumbo loans are conventional loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. For a single-family home, the conforming loan limit is set annually and varies by area. Borrowers who need a loan above the conforming limit must seek a jumbo loan.

Jumbo loans typically require higher credit scores (often 680-700 or above) and larger down payments (often 10-20% or more) compared to conforming loans. Because they are riskier for lenders, jumbo loans often come with higher interest rates and stricter financial requirements, such as larger cash reserves.

• For loans above conforming limits, which are set annually and vary by area.
• Require higher credit scores and larger down payments.
• Often carry higher interest rates and stricter reserves.

Sources: Charles Schwab, CUSO Home Lending, LendingTree

Conventional Loans

A conventional loan is a mortgage that is not backed by the government and is offered by private lenders. Conventional loans can be either fixed-rate or adjustable-rate. They come in two main types: conforming and non-conforming. Conforming loans meet guidelines set by Fannie Mae and Freddie Mac, including loan limits and credit requirements. Non-conforming loans, such as jumbo loans, do not meet these standards.

Conventional conforming loans may require a down payment as low as 3% for qualified borrowers. If you put down less than 20%, you'll typically be required to pay private mortgage insurance (PMI) until you build sufficient equity. Conventional loans are available with fixed or adjustable rates, and they may have more flexible terms than government-backed loans, though they often require higher credit scores.

• Not backed by the government.
• Can be fixed or adjustable rate.
• Down payments can be as low as 3%.
• PMI required if down payment is less than 20%.

Sources: Fannie Mae, Charles Schwab

Fixed-Rate vs. Adjustable-Rate

The choice between a fixed-rate and an adjustable-rate mortgage (ARM) depends on how long you plan to stay in the home and your tolerance for payment changes. Fixed-rate loans provide long-term stability because the rate never changes, making them ideal for long-term homeownership. ARMs start with lower rates, which can be appealing, but your rate can adjust after the initial period, potentially increasing your monthly payment.

Consider an ARM if you plan to move or refinance within a few years and want lower initial payments. However, be sure to understand the caps that limit how much your rate can increase. ARMs are available in structures like 5/6, 7/6, and 10/6, where the first number is the fixed period and the second is how often the rate adjusts afterward.

• Fixed-rate: steady payments, best for long-term stays.
• ARM: lower initial rate, but adjustable after fixed period.
• ARM caps limit how much rate can change.

Sources: Freddie Mac, Charles Schwab

Comparison of Mortgage Types

To help you compare, the table below summarizes key attributes of the main mortgage types. Data are drawn from several sources; specifics can vary by lender and over time.

Sources: Fannie Mae, Charles Schwab, Scenic Community Credit Union, PNC, Capital Bank, LendingTree

Costs and Flexibility Across Loan Types

Beyond down payment and credit requirements, costs and flexibility are key criteria when comparing mortgages. Costs include the interest rate, fees, and mortgage insurance. Flexibility refers to options like prepayment, refinancing, and whether the loan can be assumed by another buyer.

Fixed-rate conventional loans often offer the most flexibility, with options for both conforming and non-conforming amounts, and PMI that can be cancelled once you reach 20% equity. FHA loans have mandatory mortgage insurance, which cannot be easily cancelled and adds to lifetime costs. VA loans are flexible for eligible borrowers, offering no down payment and no PMI, but they may have a funding fee. USDA loans also require a guarantee fee but offer zero down payment, limited to rural areas. Jumbo loans typically have higher rates and stricter requirements, but they allow borrowing above conforming limits, which can be essential in high-cost areas.

When comparing, consider the total cost over the time you plan to stay in the home, not just the initial rate or payment. Also, think about how much flexibility you need if your financial situation changes.

• Costs: interest rate, fees, and mortgage insurance.
• Flexibility: prepayment options, refinancing, and assumability.
• Fixed-rate conventional loans offer PMI cancellation at 20% equity.
• FHA and USDA loans have mandatory insurance/guarantee fees.
• VA loans may have a funding fee but no PMI.

Sources: Charles Schwab, LendingTree, PNC