Buying a home is a significant hallmark in the lives of many adults. Oftentimes, it is only possible by financing a mortgage. The technicalities of these loans can get confusing, but the basic types are simple to understand.
Mortgages can be broken down in three different ways.
- Fixed-rate versus adjustable-rate
- Government-insured versus conventional
- Conforming versus jumbo
Fixed-rate versus Adjustable-rate
These types of mortgage loans are classified based on the terms set for interest rates on the loan. With a fixed rate-mortgage, the interest rate stays the same for as long as the loan is being paid off. With an adjustable-rate mortgage, the interest rate changes – often on a yearly basis.
Government-insured versus Conventional
The difference between these two types of mortgages is whether or not the government is guaranteeing the loan. As the name would suggest, government-insured mortgage loans are guaranteed by the federal government. On the other hand, the government does not insure or guarantee conventional loans.
Specific government-insured mortgage loan programs that may sound familiar are the FHA, the VA, and the USDA/RHS. Each one is guaranteed by a different part of the federal government, and has their own set of qualifications.
Conforming versus Jumbo
While these two categories are discussed less often, it is still important to understand what they are and how they relate to the average home buyer.
A loan is considered to be conforming if the amount falls under a maximum size limit established by mortgage lenders Fannie Mae and Freddie Mac and the underwriting meets their guidelines. Jumbo loans exceed these guidelines. Typically, jumbo loans are only given to buyers with excellent credit scores who are able to pay a significant amount of money as a down payment.
Other Considerations
One thing to note about the different types of mortgage loans is that they are not mutually exclusive. Often, mortgages will be multiple types in one – like a fixed-rate, conforming, government-insured loan or an adjustable-rate conventional loan.
Conclusion
Trying to determine the right type of mortgage loan can be difficult, but knowing what they are and the differences between them is a critical first step towards doing so.