All the Types of Mortgages - Explained in a Flash

A home loan with an interest rate that’s set for the entire 30-year term of the mortgage.

• Most popular home loan

• Your interest rate never changes

• Lower monthly payment than with shorter-term loans

Best for: Traditionally favored by most home buyers.

15-year fixed-rate mortgage

This mortgage also has an interest rate that never changes, but it’s structured to pay off the home in just 15 years.

• Interest rate is set for the life of the loan

• Lower interest rate than with longer-term loans

• Higher monthly payment than with 30-year loans

Best for: Home buyers who want to pay off their loan faster and can afford the higher monthly payments.

Adjustable-rate mortgage

A home loan with an initial rate that’s fixed for a period of time, then adjusts periodically. For example, a 5/1 ARM has an interest rate that is set for the first five years and then adjusts annually.

• Initial “teaser rate” is lower than on most other loans

• Initial rates can often be locked for one, five, seven or 10 years

Best for: Home buyers who don’t plan on being in their home for the long term or who believe interest rates are heading lower.

Interest-only mortgage

An interest-only mortgage requires payments only on the lender’s interest charge. The loan balance, or principal, is not reduced during the interest-only payment period.

• Can be appropriate for borrowers who are disciplined enough to make periodic principal payments

• Useful to home buyers who don’t expect to remain in a house for the long term

• Borrowers will have to demonstrate to lenders substantial assets or a proven ability to pay

Best for: Borrowers with high monthly cash flow, a rising income, large cash savings or an income that varies from month to month. Also for those who receive large annual bonuses they can use to pay down the principal balance.

FHA mortgage

A home loan insured by the Federal Housing Administration. FHA loans are backed by the government and designed to help borrowers of more modest means buy a home.

• Allows down payments as low as 3.5%

• FICO scores as low as 500 can qualify

• Mortgage insurance premium payments are required

Best for: Borrowers with lower credit scores and a down payment less than 20%.

VA mortgage

VA loans are backed by the Department of Veterans Affairs and are available to military service members and veterans.

• No down payment required

• There is an upfront VA funding fee

• No mortgage insurance

Best for: Military-qualified borrowers who appreciate a low interest rate and no down payment.

USDA mortgage

USDA home loans are for buyers in rural and suburban areas. The mortgages are backed or issued by the U.S. Department of Agriculture.

• No down payment is required on most properties

• Home improvement loans and grants are also available

• Income limits and property value caps apply

Best for: Income-qualified buyers in USDA-eligible areas who want a low or zero down payment.

Jumbo mortgage

Jumbo home loans are issued on homes with values above a local limit, as established by the government.

• Can have fixed or adjustable rates

• Often require borrowers to have a FICO score of 700 or higher

• Usually require a down payment of 10% or more

Best for: Buyers of higher-value homes.

Other mortgage terms

Now you know the different types of mortgages you’re likely to encounter when buying a home. Here are four subsets of mortgage types you might hear about along the way:

Conventional mortgages: Lenders use the term conventional mortgages to describe loans that aren’t backed by the government.

Conforming mortgages: Another industry term, which defines a mortgage that meets local loan limits, as set by the government.

Government-backed mortgages: Loans guaranteed by the Department of Veterans Affairs (VA loans), FHA-insured loans and loans backed or issued by the Agriculture Department (USDA loans).

Reverse mortgages: A way to unwind equity in a home as a lump sum or stream of income, for homeowners over 62.