Buying a home is exciting, whether it’s your first home, your forever home, or an investment property, but it’s also a huge financial commitment. Mortgages are complicated, and picking the right type can make a massive difference in your monthly payments, financial flexibility, long term wealth, and peace of mind.
Here’s a breakdown of the 7 most common types of mortgage loans, why people choose them, and which one might be the best fit for your situation!
1. Conventional Loans
Conventional loans are the most popular mortgage type today. They are not backed by the federal government, meaning lenders set their own requirements. Typically, you need a credit score of at least 620 and a down payment of 3–20%, depending on the loan program.
1. 30-Year or 15-Year Fixed Rate Mortgage
- 30-Year Fixed: Offers predictability and lower monthly payments, giving you flexibility to pay extra principal or save for other priorities.
- 15-Year Fixed: Higher monthly payments but lower interest rates and less total interest over the life of the loan. Ideal for building equity faster.
Pros:
- Predictable payments
- Flexibility to pay extra principal
- Potentially lower interest than adjustable loans
Who It’s Best For:
- 30 Year Fixed: Long term homeowners or those prioritizing cash flow
- 15 Year Fixed: Buyers wanting to build equity quickly and can manage higher monthly payments
2. Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) will lock in an interest rate for a specified number of years depending on the loan. Oftentimes they are offered at 5, 7 and 10 year intervals. The life of the overall ARM loan will typically be 30 years.
For example: a 5/1 ARM would offer a fixed interest rate for 5 years and then after that point, the interest rate would fluctuate with that of the market on an annual basis until the end of the loan period.
Interest rates on these ARM loans are typically lower at first, with lower payments, but you have to manage the uncertainty around where interest rates will go after that fixed period ends.
Pros:
- Lower initial interest rates
- Lower monthly payments during fixed period
Who It’s Best For:
- Buyers planning to refinance or sell before the fixed period ends
- Those comfortable with some uncertainty in future interest rates
3. Fixed Rate Interest Only Mortgage
Interest only mortgages are exactly as they sound. You pay interest payments only on the house for the specified term and then your principal payments will start kicking in after that set time period for the remainder of the loan (typically 30 years).
Interest only mortgages will typically be for 5, 10, and 15 year terms. For example: a 10 Year I/O mortgage would require you to pay interest only, at the stated fixed interest rate, for 10 years. After the 10 years, your payment would then increase to include your principal and interest payments going forward.
Pros:
- Lower initial monthly payments
- Potential significant mortgage interest deductions
Who It’s Best For:
- Buyers planning short term ownership
- Those expecting home value appreciation and not focused on building equity immediately
Non Conforming Loans
Non conforming loans are those that are backed by the US government. They often times have more flexibility as well. For example they may have lower credit limit or down payment requirements and may allow for higher debt to income allowances. See a few examples of non conforming loans below:
1. FHA Loans
Federal Housing Administration (FHA) loan is one that is insured by the FHA and backed by the US Government in an effort to provide opportunity and housing options for more modest income earners.
These FHA loans will often allow down payments as low as 3.5% and their credit score requirements will be more flexible than conventional loans.
Mortgage insurance premiums are required under an FHA loan.
Pros:
- Lower credit score requirements
- Lower down payments
- More flexible approval criteria
Who It’s Best For:
- Buyers with limited savings
- Those with less than perfect credit
2. VA Loans
A VA loan is one that is backed and secured by the Department of Veterans Affairs and are available to military service members and veterans and certain military spouses.
There are no down payment requirements and oftentimes very low interest rates accompanied with the loan. You will be responsible for paying VA funding fees which will run anywhere between 1.5% -3.5% of the loan.
Pros:
- No down payment
- No private mortgage insurance
- Competitive interest rates
Who It’s Best For:
- Qualifying military service members or veterans
3. USDA Loans
USDA loans are back and secured by the US Department of Agriculture. They are available to those who meet certain income requirements and to those who live in eligible rural areas as determined by the USDA.
There are no down payment requirements and oftentimes are accompanied with lower interest rates available.
Pros:
- No down payment
- Lower interest rates
- Support for rural property buyers
Who It’s Best For:
- Buyers in eligible rural areas
- Low to moderate income earners
203(k) Renovation Loans
A 203(k) Renovation Loan is perfect for buyers who want to purchase a home that needs work or a fixer upper and finance both the purchase price and the renovation costs in a single mortgage.
Instead of taking out separate loans or paying out of pocket for updates, this loan streamlines the process and allows you to roll renovations directly into your mortgage. It’s a great option if you’re looking to create your dream home without needing to save a massive lump sum for repairs upfront
Pros:
- Finance both purchase and renovation in one loan
- Low down payment options
Who It’s Best For:
- Buyers purchasing fixer-uppers
- Those wanting to customize a home without taking out multiple loans
How to Choose the Right Mortgage
When evaluating types of mortgage loans, consider:
- Down payment availability – Can you afford 3–20% upfront?
- Credit score – Some loans are easier to qualify for than others.
- How long you plan to stay in the home – ARMs and interest only loans may make sense short term
- Risk tolerance – Fixed rate loans offer stability; adjustable loans offer potential savings but with risk and uncertainty.
The best type of mortgage to take on simply depends on your financial goals, timeline, and comfort with risk. Take your time, run the numbers, and work with a trusted mortgage lender to make a choice that supports your lifestyle and future goals!
Resources & Next Steps:
- Check out my Letter to the First-Time Homebuyer blog for tips on costs and planning.
- Follow @finpoweredfemale for personal finance, investing, and wealth-building advice.
- Schedule a 1:1 consultation to level up your financial strategy.
- Subscribe to my weekly newsletter for insights and exclusive resources.