5 Common Mortgages, Explained

When you’re buying a home, it’s important to understand the different types of mortgages available to you. Here we’ll break down five of the most common types of mortgage loans. Keep in mind that each type has its own benefits and drawbacks, so be sure to do your research before deciding on a mortgage.

5 Common Mortgages, Explained

The most common mortgage types include:

1. Fixed-rate mortgages
2. Adjustable-rate mortgages
3. VA loans
4. FHA loans
5. USDA loans

Here’s a closer look at each.

Fixed-Rate Mortgages

Fixed-rate mortgages are the most popular type of home loan. As the name suggests, the interest rate on a fixed-rate mortgage is fixed for the life of the loan. That means your monthly payment will stay the same, even if interest rates rise over time.

One benefit of a fixed-rate mortgage is that you can predict your monthly payments for the life of the loan. That can make budgeting and long-term financial planning easier.

On the downside, fixed-rate mortgages typically have higher interest rates than other types of loans, so your monthly payments may be higher than with other types of loans. And if interest rates fall, you won’t be able to take advantage of it unless you refinance.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) have interest rates that adjust over time. The initial interest rate is usually lower than a fixed-rate mortgage, but it can go up or down as time goes on.

The benefit of an ARM is that you may be able to get a lower interest rate than you would with a fixed-rate mortgage. That can save you money on your monthly payments.

The downside is that your interest rate could go up over time, which means your monthly payments could go up as well. And if interest rates rise sharply, you could end up owing more than your home is worth.

Related: ARMs vs. fixed-rate loans

VA Loans

VA loans are available to eligible veterans and their spouses. They’re backed by the U.S. Department of Veterans Affairs and offer competitive interest rates and terms.

One benefit of a VA loan is that you may be able to get a lower interest rate than you would with a conventional loan. You also don’t have to worry about making a down payment, and there’s no private mortgage insurance (PMI) required.

On the downside, VA loans are only available to eligible veterans and their spouses, as well as a small number of other people.

Related: Can you buy a FSBO with a real estate agent?

FHA Loans

FHA loans are backed by the Federal Housing Administration and offer competitive interest rates and terms. They’re often used by first-time homebuyers because they require as little as 3.5% down.

One benefit of an FHA loan is that it’s easier to qualify for than a conventional loan. That’s because you can qualify with a lower credit score and down payment.

On the downside, FHA loans require mortgage insurance, which can add to your monthly payment. And if you stop making your payments, the FHA could foreclose on your home.

USDA Loans

USDA loans are available to eligible rural and suburban homeowners. They’re backed by the U.S. Department of Agriculture and offer competitive interest rates and terms.

One benefit of a USDA loan is that you may be able to get a lower interest rate than you would with a conventional loan. You also don’t have to worry about making a down payment, and there’s no PMI required.

On the downside, USDA loans are only available to eligible rural and suburban homeowners.

Choosing the right mortgage is an important decision, so be sure to do your research before deciding on a loan type.

Related: Why does a home appraisal matter so much?

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