Types of Mortgages and Their Advantages & Disadvantages

Mortgages are a common way to finance a home purchase. There are a number of different types and options available for all types of homebuyers.

The type of mortgage you get has a big impact on your financial goals. Learn about the benefits and disadvantages of each type to help you make the best decision for your situation.
Fixed-Rate Mortgage

The fixed-rate mortgage is the most common type of home loan. It offers stability in monthly payments and is often ideal for first-time homebuyers, investors or those with low credit scores.

Unlike adjustable-rate mortgages (ARMs), fixed-rate mortgages have interest rates that remain the same for the entire term of the loan, usually from 10 to 30 years. These mortgages offer some of the lowest interest rates available and are an excellent financing option for many homebuyers.

They also protect borrowers from sudden and significant increases in monthly mortgage payments if interest rates rise. They are simple to understand and vary little from lender to lender, but they do require that a borrower meet certain qualifying criteria.

Fixed-rate mortgages have varying risks for both borrowers and lenders, with the risk for a borrower being lower than it would be in an environment with falling interest rates. For lenders, the risk is that borrowers will not refinance their loans when interest rates drop.

A fixed-rate mortgage can be a great choice for someone who is looking to lock in a low rate and plan on staying in their home for an extended period of time, or who believes that interest rates will rise significantly over the next several years. Using a mortgage calculator, you can review how much interest and principal will be paid over the life of a fixed-rate mortgage, based on the length of your loan.

Another benefit of a fixed-rate mortgage is that its typically fully amortizing, which means that the payments you make will pay down your loan balance over time. This simplifies the process compared to an adjustable-rate mortgage, which can have many different repayment terms and features.

If youre thinking about applying for a fixed-rate mortgage, youll need to know how much you can afford in monthly payments and other financial details like property taxes and homeowners insurance. Using our mortgage calculator, you can see what your payment and total interest expense will be over the course of a fixed-rate mortgage based on the length of your loan and other factors.
Adjustable-Rate Mortgage

A mortgage with an adjustable-rate (ARM) feature can be a good choice for some people. However, it’s not right for everyone. You’ll need to consider all your financial needs and goals before making a decision about an ARM.

One big advantage of an ARM is that they usually come with lower initial interest rates than fixed-rate loans, at least for the first few years. You’ll also be able to build savings for a future home purchase, which can help you pay off the loan sooner and save money in the long run.

But ARMs can be risky, too. When you get an ARM, you’re agreeing to allow your mortgage interest rate to adjust periodically based on a market index. The first adjustment can be capped at 2 percentage points, and subsequent adjustments may be limited to as much as 1% or even more.

You’ll want to discuss these caps with your lender, and you’ll need to understand how often and how large the adjustments might be. You’ll also need to decide whether you’re comfortable with adjusting your interest rate and payments every time the index changes.

Many lenders offer ARMs with low introductory rates that last for a set period, such as five years. These loans are commonly called 5/1 ARMs, but there are other options as well.

The key is to look at the introductory rate carefully and decide how likely it is that you’ll be able to sell your house before the introductory rate is up. If you have the ability to sell the house before the introductory rate is up, an ARM can be a good option.

Another advantage of ARMs is that they are typically easier to qualify for than fixed-rate loans. They’re less risky for lenders, and they’ll help you build credit, which could make it easier for you to refinance in the future if you need to upgrade your mortgage.

If you’re considering an ARM, talk to a qualified mortgage professional about your situation and make sure you’re making the best choice for your finances. They can explain the pros and cons of each type of mortgage to help you decide which mortgage is best for you.
Jumbo Mortgage

Jumbo mortgages allow borrowers to finance homes that exceed the limits set by the Federal Housing Finance Agency (FHFA). This may be beneficial for homebuyers who want to purchase a home in high-priced areas, or who need more money to cover the cost of a home.

However, they come with higher interest rates and stricter qualifications than conventional loans. Because they are not backed by the government or Fannie Mae and Freddie Mac, these loans are seen as riskier by lenders. This is why they have higher approval requirements than traditional mortgages.

To qualify for a Jumbo loan, borrowers must have good credit, a stable income and an adequate down payment. They also must meet the lenders specific jumbo mortgage requirements, which will vary by the lender and the loan product.

Lenders will generally require a credit score of 700 or more for approval, as well as a debt-to-income ratio (DTI) below 43%. These numbers are lower than those for conventional loans, which have a higher DTI requirement of 50%.

The lender will also need to verify that you have enough cash reserves to cover six months of payments on the jumbo loan. This is because the lender is taking a greater risk and wants to make sure you can handle the mortgage even in the event of a financial crisis.

Many lenders will ask you to prove your income for two years, and they may also request bank statements and W-2 or 1099 forms from previous employers. They will then check the information to see how much you earn and how consistent your income is.

Moreover, lenders typically require you to show at least 12 months of bank statements and proof that you have a substantial down payment. This means that youll likely have to pay a larger down payment than for a conventional mortgage.

Ultimately, a Jumbo loan can be a great way to get the mortgage you need for your dream home or investment property. But before you apply for one, its important to understand all of the advantages and disadvantages of a jumbo mortgage so that you can be prepared to take on the risk.
Conventional Loan

The conventional loan is one of the most popular types of home loans. These are not backed by government agencies like the Federal Housing Authority (FHA), but rather by private mortgage lenders such as banks and credit unions. They also have a number of advantages and disadvantages that borrowers should be aware of before making a decision to use this type of financing.

The biggest advantage of a conventional loan is that it offers lower interest rates and more flexible terms than FHA and VA loans. Because these loans are not backed by the government, lenders dont have to adhere to the strict guidelines set by the federal government, so they can offer more flexible options and features.

For example, with a conventional mortgage, borrowers are sometimes allowed to pay their homeowners insurance and property taxes directly instead of having them deposited into an escrow account. This can be a huge advantage for those who are looking for more flexibility in their monthly payments, or who want to take on more debt than what the government-backed loans allow.

Another benefit of a conventional mortgage is that it typically has lower closing costs than other loan types. These are usually a fraction of the fees that you would need to pay with an FHA or VA loan, such as funding fees and upfront mortgage insurance.

In addition, a conventional mortgage can be amortized, meaning the borrower makes the same principal and interest payments over the life of the loan. This allows for a lower overall monthly payment than other loans, as the interest payments arent subject to balloon payments at the end of the mortgage term.

A conventional loan isnt as difficult to qualify for as many people think. Borrowers can often get a conventional loan with a credit score of 620 or higher, reliable income and a down payment as low as 3%.

If youre a first-time buyer, your lender will work with you to determine what kind of mortgage will fit your specific needs. They will review your credit history and financial status to make sure that you can afford the down payment, monthly payments, and closing costs associated with the loan.