Types of mortgage loans: Home financing options to consider

Selecting a mortgage loan is one of the most crucial decisions you’ll make in the homebuying process. And understanding the different types of loans available can help you make the right choice when it comes to your financial goals and homeownership plans.

The primary types of mortgage loans

A mortgage loan is used to purchase real estate, with the property itself serving as collateral. If the borrower doesn’t repay the loan, the lender has the right to foreclose on the property. Mortgages have a set term, usually 15–30 years, and involve monthly payments that cover both the principal amount and interest.disc-consumer-finance-kinds-of-loans Interest rates can be fixed or adjustable, depending on the type of mortgage loan you choose.

There are several different forms available to homebuyers, each with their own distinct terms, qualifications and benefits. The main mortgage types are conventional loans, government-backed loans, jumbo loans and interest-only loans.

Conventional mortgage loans

Conventional loans aren’t insured or guaranteed by the federal government and typically require higher credit scores and larger down payments. These loans are popular for their flexible terms and competitive rates.

Conventional mortgages can come in a few variations:

• Fixed-rate versus adjustable-rate mortgages (ARMs): Fixed-rate loans offer a consistent interest rate throughout the life of the loan, providing predictable monthly payments. ARMs feature interest rates that can fluctuate based on market conditions. However, these loans often start with a lower introductory interest rate.
• Conforming versus non-conforming loans: Conventional loans are divided into conforming and non-conforming loans. Conforming loans meet the limits set by the government and other standards set by Fannie Mae and Freddie Mac, while non-conforming loans—like jumbo loans—exceed these limits and come with stricter lending criteria.disc-consumer-finance-conventional-loansdisc-consumer-finance-conventional-loans

Government-backed mortgage loans

Government-backed mortgage loans can be accessible alternatives for those who may not qualify for conventional loans. These loans are insured by government agencies, reducing the risk for lenders and often requiring lower down payments.

The three main types include:

• FHA loans: Offered by the Federal Housing Administration (FHA), these loans have lower down payment requirements and more lenient credit score criteria. They are popular among first-time homebuyers and those with less-than-perfect credit.
• VA loans: Available through the Department of Veterans Affairs (VA), these loans are designed for veterans, active-duty service members and eligible spouses. VA loans often come with no down payment requirement and more competitive terms.
• USDA loans: These loans are offered by the U.S. Department of Agriculture (USDA) for rural homebuyers with low-to-moderate income. They typically require no down payment and have competitive interest rates. Chase does not offer USDA loans at this time.

Jumbo Loans

Jumbo loans are designed for borrowers who need to finance properties that exceed the conforming loan limits set by Fannie Mae and Freddie Mac.disc-fed-housing-loan-limit-cll-valuesdisc-fed-housing-loan-limit-cll-valuesdisc-fed-housing-loan-limit-cll-values Due to their higher amounts, these loans often come with stricter lender requirements and higher interest rates.

Interest-only mortgage loans

Interest-only mortgages allow borrowers to pay just the interest for a set time, usually up to 10 years. After this period, payments increase to cover both interest and principal. Interest-only loans can be risky due to potentially large payment increases later in the loan term.

These loans are usually better for high-value, single-family primary or secondary homes or no-cash-out refinances. They’re sometimes referred to as non-conforming loans, too.

Specialized mortgage loan programs

In addition to the main types of mortgage loans, there are also specialized programs that cater to borrowers' unique needs.

First-time homebuyer programs

Many lenders offer special programs for first-time homebuyers, including reduced interest rates, lower down payments and assistance with closing costs. Programs like FHA loans are commonly used by first-time buyers, but conventional loans with private mortgage insurance (PMI) are also viable options.

Renovation loans

Renovation loans, such as the FHA 203(k) loan or the Fannie Mae HomeStyle^® loan, provide funds for purchasing a home and financing renovations or repairs. These loans are ideal for buyers interested in fixer-uppers or properties that need significant improvements. Chase does not offer these loan products at this time.

Low down payment loans

For buyers struggling to make a large down payment, several mortgage loan options allow for minimal down payments. In addition to FHA loans, conventional loans with PMI and VA loans offer low down payment options. Some lenders also provide no down payment first-time homebuyer programs, making homeownership more accessible.

Factors to consider when choosing a mortgage loan

Taking interest rates, loan terms and your financial situation into careful consideration will help you select the mortgage loan for your new home. Here are a few things to keep in mind while you’re in the process of choosing a mortgage loan to fit your needs:

1. Type of mortgage rate: Fixed-rate mortgages offer stability and predictability, making them a safer choice for long-term homeowners. On the other hand, adjustable-rate mortgages can be beneficial if the borrower plans to sell or refinance before the initial fixed-rate period ends, as they typically start with lower interest rates.
2. Mortgage loan comparison: Comparing mortgage loan options involves evaluating different factors—such as interest rates, loan terms, down payment requirements and lender fees. Utilizing a mortgage loan calculator can help estimate monthly payments and overall loan costs.
3. Loan requirements: Mortgage loan qualification criteria vary depending on the loan type and lender. Key factors include credit score, debt-to-income ratio (DTI), employment history and down payment amount. Understanding these criteria can help borrowers prepare for the mortgage loan application process and improve their chances of approval.
4. Mortgage preapproval process: Getting preapproved for a mortgage loan is a crucial step in the homebuying process. Preapproval involves a lender reviewing the borrower's financial situation and providing a conditional commitment for a loan amount. This helps the borrower understand their budget and strengthens their position when making an offer on a home.

In summary

Mortgage loans aren’t one-size-fits-all. Understanding how mortgage loans work and the different financing options for home loans can sometimes leave you with more questions than answers. Contact a homebuying expert today to find out more about your options.