Mortgages by Interest Rate Type
One aspect of a mortgage that applies to most types of loans for homes is how the interest rate the borrower must pay is determined.
1. Fixed-rate mortgages
A fixed-rate mortgage locks in your interest rate from the first payment to the last, even as market interest rates increase or decrease. That means the principal and interest components of your monthly mortgage payment will remain constant.
For example, if you have a 30-year fixed-rate mortgage for $300,000 at a 6% interest rate, your monthly payment will be $1,799 from year one to year 30.
Keep in mind that many homeowners pay their property taxes and homeowners insurance premiums with an escrow or impound account that adds those costs to their mortgage payment. Changes to those costs will affect the total you pay to your lender each month, but the amount that goes toward paying your principal and interest will not change.
Best for: Homeowners who want a predictable mortgage payment and are averse to increases in their interest rate and monthly payment.
Pros and Cons of Fixed-Rate Mortgages
|Interest rate stays the same.
|Market interest rates can fall, leaving you stuck with a higher rate unless you refinance.
|Predictable monthly payments.
|Interest rates usually are higher than introductory rates on adjustable-rate mortgages, making them more expensive in the early years of repayment.
2. Adjustable-rate mortgages
An adjustable-rate mortgage, or ARM, has an interest rate that changes. Most ARMs lock in an interest rate for an initial term, which usually lasts three, five, or seven years. After that, the interest rate adjusts according to market rates, typically once a year.
For example, a 5/1 ARM has a fixed interest rate for five years and then adjusts once per year after that.
The fixed interest rate during the introductory period usually is lower than the rate for a fixed-rate mortgage. You’ll enjoy lower payments during that period, but after that, the rate will adjust and likely will increase at some point. That means you have to be prepared to make a larger monthly payment, which could make your home less affordable.
For example, if you get a 30-year 5/1 ARM for $300,000 at a 5.5% interest rate, your payment for the initial term will be $1,703 a month. After five years, if the interest rate increases to 6%, your payments for the next year will go up to $1,799. If your rate adjusts down to 3%, your next 12 payments would be $1,610 each.
Keep in mind that most ARMs cap how much your interest rate can adjust. There are three cap types:
- Initial adjustment cap. This limits how much your rate can change on the first adjustment after the fixed period. Expect this cap to be between 2% and 5%.
- Subsequent adjustment cap. This limits how much your interest rate can change on each following adjustment. It’s typically about 2%.
- Lifetime adjustment cap. This is how much your interest rate can increase overall from the initial rate. It’s typically set at 5%.
As you compare different lenders, pay attention to these caps and ask each lender to calculate your monthly payment at the highest possible rate.
Best for: Homeowners who can tolerate changes in their mortgage payment, or who don’t plan to own their home for the entire loan term.
Pros and Cons of Adjustable-Rate Mortgages
|Lower interest rate to start compared with fixed-rate mortgages.
|Your interest rate can increase.
|You can take advantage of decreases in market interest rates without refinancing.
|Your monthly payment can increase.
|Saves money in the short term, especially if you’re moving before the fixed period ends.
|More difficult to plan accurately for the future.
|You can build equity faster.
Mortgages by Loan Term
The loan term is how long you will make payments to repay your mortgage. A longer or shorter term affects the interest rate you’re offered, and how much you’ll pay each month and in overall interest.
3. 30-year mortgages
Loans with a 30-year term are the most popular with homebuyers. Loans with 30-year terms typically come with lower monthly payments because you repay the principal over a longer period. The downside is that longer terms typically come with higher interest rates. The combination of taking longer to repay the loan and higher interest rates means you’ll pay more overall for your loan.
Best for: First-time homebuyers who want to pay off their mortgage over the long term with lower monthly payments.
Pros and Cons of 30-Year Mortgages
|Lower monthly payment.
|You’ll be making payments on your home longer.
|Widely available through most lenders.
|Costs more in overall interest.
|Typically come with higher interest rates.
4. 15-year mortgages
The downside to a 15-year loan term is it requires a higher monthly payment. However, it will save you more money in the long run. Not only will you be paying interest on the loan for fewer years, but 15-year loans tend to come with lower interest rates. You’ll also be building equity more quickly.
Best for: Homebuyers who can afford higher monthly payments and want to pay off their mortgage sooner and save money on interest.
Pros and Cons of 15-Year Mortgages
|You’ll pay off your home loan more quickly.
|Higher monthly payment.
|Lower interest rate.
|Cheaper total loan costs.
5. Custom mortgage terms
If you don’t like the sound of a 15- or 30-year loan term, some lenders will customize your loan term. This might be appealing to homebuyers who want something in between a 15- and 30-year loan term — or perhaps have the income to pay back their mortgage in an even shorter amount of time. Custom terms typically range from 10 to 40 years, depending on the borrower’s preferences and the lender’s willingness to accommodate them.
Best for: Homebuyers who want to set their loan term length and choose exactly how long they’ll have to pay back their mortgage.
Pros and Cons of Custom Mortgage Terms
|You can personalize your loan term.
|Not available everywhere.
|You could build equity faster or get a lower monthly payment.
A conventional mortgage is financed by a private mortgage lender without a guarantee or backing from the federal government. The terms of your mortgage will reflect the lender’s assessment of how much risk you pose as a borrower.
6. Conforming mortgages
Conforming mortgages meet limits set by the federal government that allow lenders to sell them to the government-sponsored enterprises Fannie Mae or Freddie Mac. That gets the loan off the lender’s books, frees up their resources, and allows them to make additional loans. Fannie and Freddie package the loans they buy into investments, which they sell on secondary mortgage markets.
The most important requirement for selling a loan to Fannie Mae or Freddie Mac is that it must conform to a maximum loan amount. In 2024, the maximum loan amount for a single-family home in most parts of the country is $766,550. In certain high-cost areas, the maximum is a bit higher: $1,149,825 for a single-family home.
The Federal Housing Finance Agency sets the limits each year and maintains an interactive map on its website showing which limits apply in which counties.
Best for: Borrowers who have a good credit score and savings for a down payment.
Pros and Cons of Conforming Conventional Mortgages
|Lower total cost.
|Requires a higher credit score.
|Requires a down payment of at least 3%.
7. Nonconforming or jumbo mortgages
Nonconforming mortgages in some way fail to meet the federal standards that allow them to be sold to Fannie Mae or Freddie Mac. With no conditions to meet, the specifics of such loans are up to the lender and borrower and can be tailored to any situation, for any type of purchase.
The most common type of nonconforming mortgage is a jumbo loan, which is a mortgage that exceeds the federal government’s conforming loan limits. Because these mortgages are too large to be sold to Fannie or Freddie, lenders take all the risk of making such loans. Expect a more stringent underwriting process, and for lenders to require more documentation to confirm that you have enough income to afford the monthly payment.
The higher loan amount typically translates into higher closing costs, but interest rates for jumbo loans usually are comparable with those for conforming loans.
Best for: Borrowers who can afford a loan that exceeds the conforming loan limit.
Pros and Cons of Nonconforming Conventional or Jumbo Mortgages
|You can buy a more expensive home.
|Stricter underwriting requirements.
|Similar interest rates compared with conforming loans.
|A larger down payment often is required.
A government-backed mortgage is insured by the federal government to protect the lender if the borrower defaults. These mortgage types are easier to get for borrowers who have lower credit scores or who are unable to afford a large down payment. They may come with a lower interest rate because there is less risk involved for the lender.
Government-backed loans typically are intended for certain types of borrowers and usually have very specific requirements.
8. Federal Housing Administration mortgages
The Federal Housing Administration insures mortgages that are issued by private lenders and meet its requirements. FHA loans typically are easier to get than conventional loans, but they often are more expensive.
FHA loans can be a good option for buyers who can afford a small down payment and have a lower credit score. Borrowers with a minimum credit score of 500 can get an FHA loan if they put down 10% of the purchase price. A minimum credit score of 580 allows borrowers to qualify with a down payment of 3.5%.
Borrowers with better credit scores likely will find a conventional mortgage is the cheaper option.
FHA loans require all borrowers to buy mortgage insurance. They also are subject to loan limits that vary by county and may be more restrictive than limits for conventional loans. To find FHA mortgage limits by location, check with the Department of Housing and Urban Development.
Best for: First-time homebuyers who need more lenient credit score requirements.
Pros and Cons of FHA Mortgages
|Generous credit score requirements.
|Mortgage insurance is required.
|Relatively low down payment requirements.
|Borrowing limits may be lower than for conventional loans.
|Lenient debt-to-income ratio requirements.
9. U.S. Department of Agriculture mortgages
The U.S. Department of Agriculture backs mortgages for low- or moderate-income homebuyers in rural areas. Sometimes known as rural development loans, USDA mortgages typically are cheaper than FHA mortgages and require no down payment. However, borrowers must pay an upfront guarantee fee and an annual guarantee fee.
Because USDA loans are intended to help borrowers who lack access to other loan options, the rules for getting one are very specific. The home must be 2,000 square feet or less and located in a rural area with a population of fewer than 35,000 people. Borrowers also have to meet additional criteria regarding income, citizenship, and property value.
Best for: Low- to mid-income borrowers looking to buy a home in a rural area.
Pros and Cons of USDA Mortgages
|No down payment is required.
|Restricted to properties that meet size limits in specific rural areas.
|Flexible credit requirements.
|Guarantee fees are required.
|Low fixed interest rate.
|Borrowers must meet income and citizenship limits.
10. Veterans Affairs mortgages
Veterans Affairs backs mortgages for qualified military service members, veterans, and their surviving spouses. If you think you might qualify for a VA loan, the first step is to request a certificate of eligibility. To learn more about the process, consult the VA’s website.
VA mortgages have no minimum down payment requirement and don’t require mortgage insurance, but you will need to pay a VA funding fee upfront.
If you have good credit and enough savings for a decent down payment, a VA mortgage may be more expensive than a conventional loan.
Best for: Qualified veterans, military service members, and their spouses.
Pros and Cons of VA Mortgages
|No down payment is required.
|Funding fee required.
|Extensive inspection requirements.
|No mortgage insurance.
Mortgages for Low-Income Buyers
Low-income buyers may qualify for affordable home loans through specialized programs. These loans typically have income caps, and in some cases are restricted to people who work in specific professions.
11. Fannie Mae HomeReady mortgages
Fannie Mae offers the HomeReady program to homebuyers who earn less than 80% of the area’s median income and have a credit score of at least 620.
The program permits borrowers to put down as little as 3% and allows gifts, grants, or other forms of down payment assistance to be put toward the down payment or closing costs. Borrowers must take a homeownership education course.
If the property has extra space, you can use potential boarder or rental income to help you qualify for the loan.
Best for: Borrowers with a credit score of at least 620 and a relatively low income.
Pros and Cons of Fannie Mae HomeReady Mortgages
|Can use gifts or grants to help make the down payment.
|Mortgage insurance can be canceled.
|First-time buyers must take a homeownership education course.
|Can use rental or boarder income to qualify for the home loan.
12. Freddie Mac Home Possible mortgages
Home Possible is Freddie Mac’s version of Fannie Mae’s HomeReady program. Through Home Possible, buyers must have an income of less than 80% of the area’s median income. You’ll need to make a 3% down payment, but the funds can come from a grant, second loan, or gift.
Borrowers can qualify for Home Possible loans with a credit score as low as 580. If you make less than a 20% down payment, you’ll have to pay for mortgage insurance. But you can cancel this cost when you hit 20% equity in the property.
Best for: Borrowers with low or very low income who can afford a regular mortgage payment.
Pros and Cons of Freddie Mac Home Possible Mortgages
|Can use gifts or grants to cover the down payment.
|Low down payment requirement.
|First-time buyers must take a homeownership education course.
|Low credit score requirements.
13. Good Neighbor Next Door mortgages
The Good Neighbor Next Door program is available through HUD. It offers professionals in certain occupations a 50% discount on the list price of homes in HUD’s inventory. The properties are located in specific revitalization zones, and you must agree to live in the home as your primary residence for at least three years.
Qualifying professionals include full-time teachers, law enforcement officers, firefighters, and emergency medical technicians. If you qualify for this program, getting 50% off your home purchase will mean big savings.
Best for: Professionals in qualifying public service jobs who want to lock in a relatively affordable home purchase.
Pros and Cons of Good Neighbor Next Door Mortgages
|A 50% discount on the list price of certain homes.
|Professional occupation limitations.
|Affordable for certain professions.
|Significant savings on your home purchase.
|Residency commitment of three years.
Refinancing is for borrowers who already have a home loan. When you refinance your mortgage, you pay off your existing loan with the money from a new one that typically has better terms for your financial situation.
14. Interest rate refinances
If interest rates have dropped since you took out your current mortgage, refinancing to a new loan with a lower rate can reduce the amount you owe each month and reduce how much you pay in overall interest.
Best for: Homeowners paying an interest rate on their mortgage that’s higher than current market rates.
15. Loan term refinances
If qualified, homeowners who want to pay off their loan more quickly can refinance to a loan with a shorter term, while homeowners struggling to afford their mortgage may refinance to a loan with a longer term that reduces the monthly payment.
Both come with trade-offs. A shorter term generally means a higher monthly payment and saves you money on overall interest. A longer term has a lower payment but will take longer to pay off and may cost you more in overall interest.
Best for: Existing homeowners who want to adjust their mortgage repayment schedule.
16. Interest rate type refinances
If you have an ARM and are looking for more stability, you could refinance to a fixed-rate mortgage. Even if you end up with a higher monthly payment for now, you’ll have more certainty and be protected from future increases in interest rates.
Alternatively, if you expect to sell at some point, refinancing to the lower introductory interest rate of an ARM can save you money, as long as you own the home long enough to at least break even on the cost of refinancing.
Best for: Owners looking for either long-term stability or short-term savings.
17. Cash-out refinances
Your home equity is the current value of your home minus how much you still owe on your mortgage. If qualified, you can refinance for more than what you currently owe on the house, and then keep the difference in cash. Homeowners may use a cash-out refinance to pay for projects that further increase the value of their house, improve their financial security, consolidate high-interest debts, or cover other major expenses such as medical or education costs.
Best for: Homeowners who want or need to borrow cash to pay for major expenses.
Pros and Cons of Mortgage Refinancing
|You could reduce your interest rate and monthly payment.
|By restarting your loan term, you’ll make payments over a longer period and pay more in interest.
|You could shorten your loan term and pay off your mortgage sooner.
|Your current lender could charge a prepayment penalty.
|You could switch from an ARM to a fixed-rate mortgage to protect yourself from interest rate increases.
|You might be replacing your original loan with a larger one, so you’ll wind up paying more overall.
|You could use the equity in your home to fund home improvement projects or pay off debt.
A second mortgage is an additional loan that you take out alongside your primary mortgage. With a second mortgage, you use your home equity as collateral to gain access to additional funds. Second mortgages typically come with higher interest rates compared with primary mortgages and require you to make an additional monthly payment.
18. Home equity loans
With a home equity loan, you borrow a lump-sum amount secured by your home equity. It’s repaid with monthly payments in addition to your primary mortgage, usually with a fixed interest rate.
Best for: Homeowners who want to borrow a lump sum from their home equity.
19. Home equity lines of credit
A home equity line of credit lets you borrow cash as needed up to a maximum amount secured by your equity. It works much like a credit card, with your loan amount as the credit limit, and with an adjustable interest rate. Many HELOCs have an initial period when withdrawals are allowed. After the withdrawal period ends, you are required to pay it off with regular monthly payments.
Best for: Homeowners who want to borrow cash from their home equity as needed.
20. ‘Piggyback’ mortgages
A “piggyback” loan is a home equity loan or a HELOC you obtain when financing your home purchase. Accessing these loan funds upfront can help a borrower make a larger down payment or reduce the amount needed for their primary loan. That can help you qualify for a conforming conventional loan as your primary mortgage, or avoid paying for PMI.
Best for: Buyers up against their borrowing limit who can benefit from multiple loans.
Pros and Cons of Second Mortgages
|They can make it easier to afford a home.
|They increase your overall debt.
|Lower interest rates than other types of loans.
|Costs and fees required.
|Greater risk of foreclosure.
Other Types of Mortgages
Lenders offer mortgages with different structures to suit the specific needs of borrowers. These usually are complicated financial products, so borrowers should fully understand the risks and drawbacks before committing to one.
21. Portfolio loans
Lenders typically sell mortgages on a secondary market, but a portfolio loan is one that the lender keeps in its portfolio. This opens up homeownership to more people who don’t meet Fannie Mae and Freddie Mac’s eligibility requirements, but it also means the lender is taking on more risk. As a result, you can expect higher fees, interest rates, and down payment requirements.
Best for: Homebuyers who don’t qualify for a conventional loan due to recent financial issues such as bankruptcy, foreclosure, or poor credit.
22. Balloon mortgages
With a balloon mortgage, your home loan won’t be completely paid off when you reach the end of the term. Instead, you’ll have to make a large final payment to cover the remaining principal. While this could reduce your monthly payments at the beginning of your loan term, balloon mortgages can be financially overwhelming if you can’t afford the last payment when it’s due.
23. Interest-only mortgages
Interest-only mortgages are a type of balloon mortgage, where you pay only the interest each month for a set amount of time — usually five or 10 years. After that, you start repaying the principal as well as the interest, and the monthly payment increases accordingly.
Best for: Buyers who need a lower payment now and expect their income to increase over time.
24. Construction mortgages
Construction mortgages are for aspiring homeowners who want to build a home instead of buying one. This type of mortgage only covers the cost of building the home. After that, the borrower needs to apply for another type of mortgage to buy the finished home.
Best for: Borrowers who want to build their own home.
25. Renovation and rehabilitation loans
The FHA offers 203(k) rehab loans to help borrowers save time and money if they are buying a home that needs repairs and is being sold “as is.” Instead of two separate loans, 203(k) loans are a single mortgage with either a fixed or adjustable interest rate, and can be used to pay for renovation materials and labor. Because 203(k) loans are insured by the FHA, they also can come with more flexible qualification requirements compared with conventional loans.
Best for: Buyers looking at a fixer-upper who want a single loan that lets them both buy the home and pay for renovations and repairs.
26. Mobile- or manufactured-home loans
If you’re looking into buying a mobile or manufactured home, you’ll find that lenders typically don’t offer conventional loans for this type of property. Because these homes are prefabricated — its components are made at a factory and assembled on location — many lenders don’t consider them real property.
Mobile- and manufactured-home loans are available from Fannie Mae, Freddie Mac, the FHA, and the VA. To qualify, the home typically needs to meet certain criteria regarding size and other property details.
Best for: Buyers who want to purchase a manufactured or mobile home.
27. Physician loans
Physician loans make it possible for medical professionals to buy a home when they have recently taken on a large amount of debt from medical school but are not yet earning the income they expect to make once established in the profession. Despite having a large DTI ratio, medical professionals are more likely to make more money down the line. As a result, this loan option allows them to make a small down payment — or no down payment at all — and avoid having to pay for PMI.
Best for: Medical professionals who want to buy a home without having to make a down payment.
28. Nonqualifying loans
A qualified mortgage meets certain requirements set by the Dodd-Frank Act and the Consumer Financial Bureau that limit risky features and require lenders to confirm that the borrower can repay the loan. A nonqualified loan, on the other hand, fails to meet these requirements in some way. For example, it might allow for a 40-year loan term or a higher debt-to-income ratio. However, since the lender is taking on more risk, you can expect a higher interest rate and down payment requirement.
Best for: Homebuyers who are self-employed, have income that’s difficult to document, or have a large amount of debt.
29. Reverse mortgages
Like second mortgages, reverse mortgages allow older homeowners to borrow against the equity in their home. They can do so as a lump sum, a series of regular payments, or a mixture of both.
Interest and fees on the borrowed amount are added to the principal over time, which increases the total amount owed. As the loan balance grows, the borrower’s home equity is reduced.
The principal on a reverse mortgage isn’t due until the borrower no longer lives in that home as their primary residence. Often, a reverse mortgage is paid off by selling the home after the borrower moves out or dies.
The most common type of reverse mortgage is called a home equity conversion mortgage. It allows homeowners ages 62 and older to use their equity to stay in place in their later years. The downside is giving up equity — once the reverse mortgage is paid off, the homeowner will have less money to use or pass on to their heirs.
Best for: Older homeowners who want to exchange their equity for cash that will allow them to stay in their home in their later years.
Tips for Choosing a Mortgage
Now that you know the key differences between these mortgage types, you may still be asking yourself, “What type of mortgage should I get?” Here are some tips to help you decide:
Determine what you can afford
If your financial situation is stable and you can comfortably afford a loan’s monthly payments — even if they increase — then you may be able to take on a mortgage with a shorter term or an adjustable interest rate. But if your income is subject to change or you’re concerned about costs, then you might want to go the safer route with a fixed interest rate and longer loan term.
Examine the rest of your budget
Making your mortgage payments is important, but you also need to ensure you’re leaving enough money left over to cover the rest of your expenses. Be sure to also factor in home maintenance costs, which can include surprise — and sometimes expensive — repairs. You don’t want to run the risk of becoming “house poor,” which is when too much of your income goes toward the costs of homeownership.
See what mortgage programs you qualify for
If your credit score is low, or you can’t afford a large down payment, then an FHA mortgage could help you buy a home sooner. Qualified veterans or homebuyers in rural areas can look into a VA loan or USDA mortgage, respectively.
Consider how long you plan on owning the home
If you are buying a starter home and don’t plan to own it for long, then you could consider a 15-year mortgage to build equity faster, or an ARM to pay less interest before the rate adjusts. But if you plan on staying in the home for a long time, then you can lighten the monthly financial pressure with a fixed rate and longer term.
“Homebuyers should consider their short- and long-term plans when deciding between a fixed-rate and adjustable-rate loan,” says Rashalon Hayes, assistant vice president of integrated member strategy at Navy Federal Credit Union in Vienna, Virginia.
“Homebuyers should speak with multiple lenders before ever getting their credit pulled to ask about the options available to them,” Hayes says. “Doing so will help borrowers find not only their ideal mortgage product but also a lender they can trust.”