What are the Most Common Types of Mortgages?

If you are a first time home buyer, the amount of options available for financing can leave you a bit confused. You might be wondering what are the most common types of mortgages and what is available to me? While I’m not a home loan expert, I have helped hundreds of people through this process, so here is a super simple recap of the most common types of mortgages. There are expert lenders who can answer more in-depth questions and this article is not meant to be your only resource on this topic. I just want to provide an overall view of what the most common home loan options are.

Fixed-Rate Mortgage

A fixed-rate mortgage is by far the most common type of home loan. A fixed-rate mortgage essentially allows you to borrow the lump sum you need to purchase your home and then pay back the original amount borrowed, plus interest, in regular monthly installments. Once you lock in an interest rate, it stays the same through the life of the loan, so it’s great for those who like predictable monthly payments (though there may be some fluctuation for taxes).

A fixed-rate mortgage is typically either a 15-year or 30-year mortgage. Qualification for a fixed-rate mortgage does require a decent credit score and some money down, though it is a common myth that you need a full 20% down payment. Talk to your lender, as there are options available for as little as 3% down.

ARM

An ARM (or adjustable rate mortgage) is similar to a fixed-rate mortgage at the beginning of the loan, but then transitions to an adjustable interest rate after a period of time. For instance a a 3/1 ARM would have a fixed rate for the first 3 years of the loan and then would adjust every year after that based on market changes.

While an ARM might be tempting since those initial payments can be lower, it really only works in your favor if interest rates drop or stay steadily low after those first few years. Of course, there is no way to look into the future and know that is the case, so an ARM is best for those who know they will only be living in their home for a short period of time, or who feel confident they can refinance at some future date.

FHA

The Federal Housing Association (FHA) works to help people who cannot always qualify for a typical fixed rate loan. They insure special FHA loans for those who do not have excellent credit, or a full 20% down. FHA loans are popular with first time home buyers for that reason.

If you are looking at an FHA loan they must be sought through a government approved lender and there are a few regulations that apply. First, there is a cap on the amount you can borrow. And second, you will be required to pay a Mortgage Insurance Premium. Because these are government backed loans, there are a bit higher stipulations on the condition of a property the loan is being used for, but overall they are a great option if your credit is not super high or you don’t have much of a down payment.

VA

VA loans are also government backed loans, but they are specifically for US Veterans and those who have lost a spouse in the line of duty or a service member who was disabled on duty. VA loans require 0 down payment and unlike an FHA loan, they do not require you to pay PMI. This can be a great advantage to those who qualify for this type of loan and service members can often qualify for one even if they have a bankruptcy or foreclosure in their past.

A VA loan is backed by The Department of Veteran Affairs and thus there are some restrictions on the type and condition of the property they can be used for. In general they are for a primary residence that is in good condition. There is no limit on how much can be borrowed, but there is a mandatory VA Funding Fee on each new loan.

With this simplified recap of the most common types of mortgages, you should be able to have a foundational understanding of mortgages when you head in to talk to a lender. Again, these are simplified definitions of mortgage types and your individual lender can help guide you to what is best for your situation. I know some expert lenders in Boise, so if you need recommendations, please just ask!