Types of mortgages

When you’re shopping for a mortgage, it’s helpful to know about these five basic mortgage types so you can choose the best option for your situation.

The most popular mortgage is the 30-year, fixed-rate conventional loan, which gives borrowers 360 identical monthly payments and typically requires a down payment of 5% to 20%, depending on the lender and market conditions.

Each month, part of your payment goes toward principal (the money you borrowed to buy the home) and part goes toward interest (the cost to borrow that money). A 30-year mortgage will have a lower monthly payment but cost you more in the long run compared to a 15-year mortgage.

The 15-year, fixed-rate mortgage works just like the 30-year mortgage, except that it has 180 identical monthly payments. It is less popular because its monthly payments are higher (because you’re trying to pay off the same home in less time), but it’s less expensive overall.

Not only will you pay interest on the amount borrowed for just 15 years instead of 30, the interest rate on 15-year mortgages is typically a half to a full percentage point lower than the 30-year rate because these mortgages present less risk to the lender. Our simple loan payment calculator will show you what your monthly payment will look like at different rates and terms.

The most common type of adjustable-rate mortgage is the 5/1 ARM. It has a fixed interest rate for the first five years (the introductory period). Afterward, the interest rate resets once a year based on market conditions.

ARMs are attractive because the introductory rate tends to be even lower than the 15-year fixed rate, meaning that homeowners enjoy the lowest available monthly payments during their first five years of home ownership. Once the introductory period ends, however, homeowners face significant uncertainty regarding what their monthly payment will be and whether it will be affordable.

FHA loans, guaranteed by the Federal Housing Administration, help borrowers with less-than-ideal credit. These loans require just 3.5% down as long as your credit score is at least 580. If your credit score is lower, you still can qualify for a loan, though most lenders want to see a score in the low 700s at a minimum.

FHA borrowers must pay an up-front mortgage insurance premium of 1.75% of the loan amount and make monthly FHA mortgage insurance payments of one-twelfth of 1.25% of the loan balance for the duration of the loan.

Finally, VA loans, backed by the federal Department of Veterans Affairs, are available to veterans, active duty service members, and members of the National Guard and reserve units. They don’t require any down payment or mortgage insurance.

The interest rates are comparable to those for conventional loans, and VA loans allow borrowers to have lower credit scores and carry more debt than conventional loans. VA loans have a one-time funding fee, typically 2.15% of the amount borrowed, which most borrowers roll into the mortgage.