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14 Types of Mortgages You Should Know About

Author: Christy Bieber | April 19, 2021

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There are many types of mortgage loans

When you get ready to buy a home, you'll likely need to get a mortgage. But there's not just one type of mortgage loan -- there are many different loan options.

The right loan for you will depend on many factors including your financial credentials and the type of home you want to buy. You should explore all 14 of these different mortgage loan options to decide which one is best for you.

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1. FHA loans

FHA loans are loans that are guaranteed by the Federal Housing Administration. If you have a small down payment, a low credit score, or other financial credentials that may make lenders wary, an FHA loan may be the ideal choice.

FHA loans are easier to get approved for than loans the government doesn't stand behind. With a 10% down payment, FHA loans could even be available with a credit score as low as 500. For those with a credit score of at least 580, it's also possible to secure an FHA loan with just a 3.5% down payment.

These types of loans undoubtedly make it easier for people to get into a house if they don't have solid financial credentials.

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2. VA loans

There's no down payment at all required for VA loans, and no minimum credit score.

If you are an eligible veteran, these types of loans could be your best bet for getting into a home.

You won't have to pay for mortgage insurance with a small down payment, either, unlike with most loan types that require this insurance to protect lenders if you make a down payment below 20%.

ALSO READ: What Is Private Mortgage Insurance?

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3. USDA loans

USDA loans are also available to lower-income borrowers with low down payments and imperfect credit.

There are rules on the size and cost of the home you can buy with them, but if you are purchasing an affordable home in a rural area, they could be an ideal way to get an affordable mortgage.

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4. Conventional loan

Conventional loans is a term used for loans that don't come with government backing. Without a guarantee from the USDA, FHA, or VA, lenders take a bigger risk by making a conventional loan.

Conventional loans can be a better choice for well-qualified buyers because they don't come with some of the up-front costs that government-backed loans generally do.

If you have good credit, don't owe too much relative to your income, and can put down at least some money for your home, a conventional loan could be the right type of mortgage for you.

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5. Conforming loan

A conforming loan is one that meets requirements set by two government-sponsored entities called Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac purchase most mortgages on the secondary market. Since lenders generally prefer reselling loans on this market rather than managing them themselves, it can be easier to get a conforming loan than a nonconforming one.

There are several requirements for conforming loans, but loan limits are especially important. To be conforming, the loan amount must be below $548,250 in most parts of the country or below $822,375 in certain high-cost areas.

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6. Jumbo loan

Jumbo loans are loans for amounts that are above the limit for conforming loans set by Fannie Mae and Freddie Mac.

If you are borrowing to buy a more expensive home, you may need a jumbo loan. You should be aware that the requirements to qualify for a jumbo loan may be more stringent than for a conventional one. In some cases, the interest rates are also higher on jumbo loans.

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7. Fixed-rate loans

You'll have to choose how you want interest rates to be structured on your mortgage loan.

Fixed-rate loans are an especially common and popular option. With a fixed-rate loan, you will find out your interest rate before you borrow. The rate will not ever change while you are working on paying it back.

This type of loan is the right choice if you don't want any surprises. You'll know what your monthly payment will be, and will know your total costs up front.

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8. Adjustable-rate mortgages

An adjustable-rate mortgage, or ARM, works very differently than a fixed-rate loan because the starting rate stays in effect for a limited time. The specific length depends on the loan. For example, the rate is fixed for the first five years with a 5/1 ARM or for the first seven with a 7/1 ARM.

After that time, your rate can move. It's tied to a financial index, and it may go up or down. If it goes up, payments and total loan costs are higher.

ARMs are risky loans, but some people prefer them because they often come with a lower introductory rate than fixed-rate alternatives. If you expect to move or refinance before the rate begins adjusting and you're OK with taking the chance that this doesn't happen, then an ARM might be for you.

ALSO READ: Have an Adjustable-Rate Mortgage? It Could Really Pay to Refinance Now

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9. 30-year loans

A 30-year fixed-rate loan is one paid off over 360 payments. This is the most popular type of mortgage because taking so long to pay debt makes monthly payments very affordable.

Of course, the downside is that total interest costs can be quite high over three decades of paying interest.

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10. 15-year loans

A 15-year loan is also a popular loan repayment term. It obviously cuts the payment time in half compared with a 30-year loan. The big upside to this is that you become debt-free much sooner and you don't pay nearly as much total interest.

Of course, the downside is that you have to make much higher monthly payments. There's an opportunity cost you need to consider before choosing a 15-year mortgage versus a 30-year loan.

ALSO READ: 15 vs. 30-Year Mortgage: What's Best for You?

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11. Interest-only mortgages

Interest-only mortgages are mortgage loans that allow you to only pay interest for a limited time.

Once that initial period ends, you'll either have to make higher monthly payments later to pay off your loan or will need to make a one-time lump sum payment.

Interest-only mortgages are risky loan products that people sometimes use to buy a home they can't really afford. They should almost always be avoided.

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12. Balloon mortgages

Balloon mortgages require you to make payments for a limited period of time, after which you will owe a large lump sum payment.

These are extremely risky loans because you'll essentially have to repay your entire mortgage loan balance after only a few years. Like interest-only loans (which they are often paired with), these loans should generally be avoided.

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13. Bridge loans

Bridge loans allow you to buy a new house before selling another. You can usually borrow as much as 80% of the combined value of your current house and the one you hope to purchase.

The goal of a bridge loan is to provide short-term funding. After your existing home sells, you'll repay the bridge loan and secure a new mortgage (typically at a more favorable rate) for your new house.

It can be quick to get approved for a bridge loan, but you'll usually pay a higher interest rate than with a typical mortgage. And your monthly payments could be very high. It's usually best to try to avoid these types of loans if you can.

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14. Mortgage refinance loans

The final loan type to be aware of is a mortgage refinance loan. Refinance loans pay off existing home loans. They can come with slightly higher interest rates than new mortgages, but may allow you to significantly reduce the cost of loan payoff if the rate is below what you're currently paying.

It can make sense to secure a refinance loan when rates have fallen since you initially borrowed to buy your home. Some people also use cash-out refinance loans to tap into the equity in their homes.

ALSO READ: 5 Cash-Out Refinancing Mistakes to Avoid

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Which mortgage loan is right for you?

Now you understand all of the different kinds of mortgages available. You can pick the loan that makes sense for your long-term financial situation so you can maximize the chances that buying your home will be a decision that pays off over the long run.

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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

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