Types of Mortgage Loans

 

Table of Contents

1. Convential and Non-Conventional Loans
    
2. Fixed-Rate Mortgage
    
3. Adjustable-Rate Mortgage (Hybrid ARM)
    
4. Government Loans
    
   • FHA Loans
      
   • VA Loans
      
   • USDA Loans
      
5. Jumbo Loans
    
6. Specialty Loans
    
   • Interest-Only Mortgages
      
   • Balloon Mortgages
      
   • Reverse Mortgages
      
   • Construction Loans
      
7. Home Equity Products
    
   • HELOCs (Home Equity Line of Credit) & Home Equity Loans
      
8. Additional Mortgage Loan Types
    
   • 203(k) Loans
      
   • Energy Efficient Mortgages (EEMs)
      
   • Portfolio Loans
      
   • Community or Local Housing Loans
      

Key Takeaways

• Choosing the right mortgage depends on your financial situation, long-term plans, and how much you can afford.
   
• Fixed-rate mortgages offer stability, while adjustable-rate mortgages provide lower initial payments.
   
• Government loans like FHA, VA, and USDA can help if you have a smaller down payment or are in specific categories.
   
• Specialty loans, like interest-only or balloon mortgages, are less common but may suit specific financial strategies.
   
• Consider your long-term goals, risk tolerance, and budget when selecting your mortgage type.

 

Conventional and Non-Conventional Loans

Conventional Loans

Conventional loans are the most common type of home loan. These loans are not backed by the government. To get one, you usually need a good credit score and more documents to prove you can pay it back. If you qualify, the good news is they often come with lower interest rates and fewer fees. Fixed-rate and adjustable-rate mortgages are both examples of conventional loans.

Non-Conventional Loans

Non-conventional loans are backed by the government. They’re made to help people who might not qualify for a regular loan. These loans are often easier to get, especially if you have a lower credit score or less money for a down payment. Some examples are FHA loans, VA loans, USDA loans, and Jumbo loans. While these loans can be more flexible, they sometimes have higher fees compared to conventional loans.

 

Fixed-Rate Mortgage

A fixed-rate mortgage is a loan many people choose when buying a home. With this loan, the amount you pay each month stays the same. That means your interest rate and your monthly payment won’t change for the whole time you’re paying off the loan. This time is called the loan term, and it could be 15, 20, or 30 years.

This type of mortgage helps you plan your money better. You’ll know exactly what to pay each month, even if other loan rates go up. It gives peace of mind over time.

 

Adjustable-Rate Mortgage (Hybrid ARM)

Looking for a lower initial payment? A fixed-period ARM, also known as a hybrid ARM, might be a good fit. With this loan, you get an introductory period—typically 3, 5, 7, or 10 years—where your interest rate stays fixed. After that, the rate becomes adjustable and may change annually for the remainder of the loan term.

For example, in a 5/1 ARM:

• The “5” means your interest rate stays fixed for five years.
   
• The “1” indicates that after the five years, the rate can adjust once per year.
   

Hybrid ARMs are often appealing to buyers who plan to move, sell, or refinance before the adjustable period begins.

 

Government Loans

These loan options are insured or guaranteed by federal agencies to make homeownership more accessible, especially for buyers who may not qualify for conventional financing.

FHA Loans

FHA loans are backed by the Federal Housing Administration and are a solid option for buyers who don’t have a 20% down payment saved or who have a lower credit score. These loans offer:

• More flexible credit and income requirements
   
• Lower down payment options (as low as 3.5%)
   
• Loan limits based on location
   

 

However, FHA loans require you to pay mortgage insurance premiums (MIP):

• An upfront premium (UFMIP), which must be paid at closing or rolled into the loan
   
• A monthly annual premium, added to your mortgage payment
   

 

VA Loans

If you’re a current or former member of the U.S. military—or a qualifying surviving spouse—you may be eligible for a VA loan, which is backed by the Department of Veterans Affairs.

VA loans offer outstanding benefits:

• No down payment required in many cases
   
• No private mortgage insurance (PMI)
   
• Lower interest rates compared to many conventional loans
   

There are limits on the loan amount, and you’ll need a Certificate of Eligibility to qualify. If you think you may qualify, be sure to let your lender know early on.

 

USDA Loans

Offered by the U.S. Department of Agriculture, USDA loans are designed to help low- to moderate-income buyers in eligible rural and suburban areas.

Benefits include:

• Zero down payment
   
• Competitive interest rates
   
• Lower mortgage insurance costs
   

You’ll need to meet income limits and purchase a home in a qualifying area. If you're open to locations outside of urban centers, this could be a great affordable path to homeownership.

 

Jumbo Loans

If you're buying a home in a high-cost area or looking at more expensive properties, you might need a jumbo loan. These loans exceed the conventional loan limits set by Fannie Mae and Freddie Mac—usually around $417,000, though this varies by location.

Jumbo loans typically require:

• A higher credit score
   
• A larger down payment
   
• Stronger income and asset documentation
   

They aren’t government-backed, so lenders take on more risk—but if you’re shopping at the upper end of the market, they can be essential.

 

Specialty Loans

In addition to the traditional and government-backed loans, there are a few specialty mortgage types that serve unique financial needs. These are less common but can be useful in specific situations.

Interest-Only Mortgages

With an interest-only mortgage, you pay just the interest for a certain number of years—often 5 to 10. After that, you’ll begin paying both principal and interest, which can significantly increase your monthly payment.

This type of loan is sometimes used by high-income earners or investors who want to maximize cash flow in the short term. It’s not ideal for everyone, but in the right scenario, it offers flexibility early on.

 

Balloon Mortgages

A balloon mortgage features low or interest-only payments for a short period—usually five to seven years—followed by one large, final "balloon" payment of the remaining balance.

These loans can work well if you’re confident you’ll sell or refinance before that large payment is due. However, they come with a higher risk if your financial situation or the market changes unexpectedly.

Reverse Mortgages

For homeowners aged 62 or older, a reverse mortgage lets you tap into your home’s equity and convert it into cash—without making monthly mortgage payments.

Instead, the loan is repaid when you sell the home, move out permanently, or pass away. This can be a helpful retirement tool but should be considered carefully, as it can affect your estate and long-term plans.

Construction Loans

If you're planning to build your own home, a construction loan can provide the financing you need during the building process. These are typically short-term loans that convert into a permanent mortgage once construction is complete.

You’ll typically need:

• A detailed construction plan
   
• A licensed builder
   
• Strong credit and income to qualify
   

Construction loans often have higher interest rates during the build phase, but they’re essential for custom home projects.

 

Home Equity Loans & HELOCs

While technically not used to purchase a home, these are important tools for tapping into the value of a home you already own.

• A home equity loan gives you a lump sum and has a fixed interest rate.
   
• A home equity line of credit (HELOC) works more like a credit card, giving you access to funds as needed.
   

Many homeowners use these loans for home improvements, education costs, or debt consolidation.

 

Additional Mortgage Loan Types

203(k) Loans

A type of FHA loan for fixer-uppers — combines mortgage + renovation costs into one loan.

• Great if targeting buyers interested in rehab properties.
   

Energy Efficient Mortgages (EEMs)

Available through FHA, VA, or conventional programs.

• Helps finance green home upgrades (like solar panels, insulation, etc.).
   

Portfolio Loans

Portfolio loans are held by the lender, not sold to secondary markets.

• Can offer more flexible terms for unconventional borrowers or unique properties.
   

Community or Local Housing Loans

Regional or nonprofit-backed programs that offer low down payments, reduced rates, or forgiveness incentives.

• Could be mentioned generally as "Local and Specialty Programs" to encourage readers to ask their lender.

 

Pros and Cons of Each Loan Type

 

FAQs

1. What is the best mortgage loan type for first-time homebuyers?

FHA would be the best choice because of low downpayments and flexible credit criteria.

2. Are ARMs a good choice if I plan to live in the home for a long time?

No, you should opt to fixed-rate mortgage instead.

3. What are the risks of balloon mortgages?

The large payment at the end of the loan term. Make sure you are financially stable during the term.

4. Can I use a home equity loan for anything?

You can use the HELOC for home improvements, education, or for debts. But, pay consistently because your house serves as collateral.