mortgage

Products & services

what are the different
mortgage types?

Thousands of products.

At first glance, your mortgage options can send your head spinning. Yes, it’s technically true that there are thousands of different products out there. But no, it doesn’t have to be difficult to understand.

Three simple choices.

At their core, all mortgages are made up of three simple choices:

1. Will it be a fixed-rate or an adjustable-rate mortgage?

The first choice you’ll have to make regards the structure of your interest payments. Either your rate will be fixed for the loan term, or it will be adjustable.

fixed-rate mortgage (FRM)

As the name implies, this type of loan has a fixed interest rate for the duration of the term. This was the first loan amortization introduced in the United States, and it remains the most commonly used type.

adjustable-rate mortgage (ARM)

In contrast to its “fixed” counterpart, an adjustable-rate mortgage will periodically “adjust” over the life of the loan. The interest rate is based on a market index plus what’s called an ARM margin, which reflects the lender’s cost of borrowing money. This means that your monthly payments may increase or decrease as the index rate goes up or down.

 In the U.S. most ARM loans are actually a hybrid of both fixed- and adjustable-rate mortgages. Typically, the mortgage is fixed for a set period and then becomes adjustable at predetermined intervals. For example, a 3/1 ARM is fixed for the first three years and adjusts every year thereafter.

comparison chart

the Pros & cons

FRM

interest Rate

The interest rate is guaranteed to be the same for the life of the loan, irrespective of market conditions.

monthly payments

The loan is amortized –or broken up– into equal payments, so you will owe the same amount your first month as you will on your last, making your payments predictable.

interest vs. principal

While your payment will stay the same, month over month, the ratio of principal to interest that your payment will cover will vary slightly over the life of the term.

most common term

The most common term is 30 years, followed by 15 years. 

ARM

interest rate

The interest is open to market fluctuation, which means that if rates go up or down, so would your payments. 

rate increases

For the protection of homeowners, there are federally regulated caps on how much the interest rate can increase year over year as well as over the life of the loan.

Risk vs. savings

ARM rates are typically lower than FRM rates. This is because  the lender knows they will be able to operate at or close to the market rate for the duration of the term.

Risk vs. savings

The most common loans are 3/1 & 5/1 ARM.

a rule of thumb.

If it's your first time buying or if you plan to stay in this home for a long time, a fixed-rate mortgage is advisable. However, if you think you may sell or refinance within several years, an adjustable-rate mortgage may be the smarter financial choice.

2. Will it be a conventional or a state-backed mortgage?

 

The second decision you’ll have to make is what program to apply for. The federal government has developed several insurance programs in order to facilitate homeownership for certain groups who may otherwise struggle to achieve it. If you’re eligible for one of these programs, you may have options that include more flexible requirements. If not, your choice is easy: conventional loan it is.

conventional & state-backed mortgages.

conventional loans.

A conventional loan or conventional mortgage simply means that it isn’t offered or insured by the federal government.

FHA loans (state-backed).

FHA loans were a product of the Great Depression of the 1930s, designed to help lower income families to become homeowners. They are insured by the FHA (Federal Housing Administration) but funded by any FHA-approved lender. As with all state-backed loans, this means that the FHA agrees to repay your lender in the event that you default on your mortgage.

  • minimum down payment: 3.5%
  • minimum credit score: 580
  • if credit is below 580, required down payment: 10%
  • the entire down payment may be a gift
  • must be owner occupied for at least one year
  • mandatory mortgage insurance, which includes a one-time bulk payment as well as monthly payments

VA loans (state-backed).

The Department of Veteran Affairs (VA) offers a home loan program for eligible US service members. Like FHA loans, these loans are federally backed but funded by private VA-approved lenders. This means that if you stop being able to make payments, the VA will repay the lender. As a result, the lender assumes less risk, which translates into VA loans sporting some of the best rates and terms of all mortgage products.

  • minimum credit score: none
  • minimum down payment: none
  • no prepayment penalties
  • limited closing costs, may be paid by the seller
  • payment assistance from the VA to prevent default
  • no private mortgage insurance (PMI)
  • must be owner occupied for at least one year
  • one-time funding fee (from 1.4%–2.3% for first use, depending on size of down payment)

USDA loans (state-backed).

The U.S. Department of Agriculture (USDA) offers a mortgage program for people with stable but lower income in rural America. This program is managed by Rural Housing Services (RHS), which is also part of the USDA, and includes farms as well as non-farm homes. Like all other federally-backed home loans, USDA loans are only insured by the state but funded by any USDA-approved lender.

  • minimum down payment: none
  • must be owner-occupied
  • must be recognized as a rural area by the USDA
  • allows considerations for expenses like child care
  • must meet county income restrictions (typically, no more than 115% of the area median income (AMI))

3. Will it be a conforming loan or a jumbo loan?

The final decision you’ll have to make when getting a mortgage is whether you’d like a conforming or a jumbo loan, referring to the size of the loan relative to county limits.

conforming loans.

Simply put, a loan is “conforming” if it falls within maximum size limits for your county, as established by Fannie Mae or Freddie Mac.

How it works: Fannie and Freddie are both Government Sponsored Enterprises (GSE) whose purpose is to expand the secondary mortgage market. They do this by buying home loans directly from lenders, securitizing them into Mortgage Backed Securities (MBS), and selling them to other investors. If a home meets their underwriting criteria, Fannie and Freddie guarantee that they would buy it from the lender. If the loan “conforms” to this criteria, the lender assumes less risk and can therefore charge less.

jumbo loans.

In contrast to Conforming loans, Jumbo loans exceed the size limits set by the two GSEs. This means that Fannie Mae and Freddie Mac do not guarantee that they would be willing to buy this loan from the lender. As a result, this type of mortgage poses a higher risk to the lender, which means that credit and down payment requirements are typically more stringent. In addition, Jumbo loans also generally have higher interest rates than their Conforming counterparts.

Scroll to Top