3 Types of Mortgages: Which One is Right for You?

When it comes to buying a home, finding the right property is only half the battle. The other half is choosing the best type of mortgage. Unless you can buy your home with cash, you'll need to borrow money from a lender and come to a legal agreement to repay that loan for a set period of time (albeit with interest). There are two components to paying your mortgage: principal and interest.

The principal refers to the amount of the loan, while interest is an additional amount (calculated as a percentage of principal) that lenders charge you for the privilege of borrowing money that you can repay over time. When it comes to mortgages, not all products are created equal. Some have stricter guidelines than others, and some lenders may require a 20% down payment while others require as little as 3%. To qualify for some types of loans, you need flawless credit, while others are geared toward borrowers with less than stellar credit.

To help you make an informed decision, let's take a look at the three main types of mortgages available: conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans are not backed by the federal government. Borrowers with good credit, stable employment history and income, and the ability to make a 3% down payment can generally qualify for a conventional loan backed by Fannie Mae or Freddie Mac, two government-sponsored companies that buy and sell most conventional mortgages in the United States. To avoid the need for private mortgage insurance (PMI), borrowers generally need to make a 20% down payment.

Some lenders also offer conventional loans with low down payment requirements and no private mortgage insurance.

FHA Loans

Low-moderate-income buyers buying a home for the first time often turn to loans insured by the Federal Housing Administration (FHA) when they can't qualify for a conventional loan. Borrowers can put in as little as 3.5% of the purchase price of the home. FHA loans have more relaxed credit rating requirements than conventional loans.

However, all borrowers pay an annual upfront mortgage insurance premium (MIP), a type of mortgage insurance that protects the lender from default by the borrower for the life of the loan.

VA Loans

Department of Veterans Affairs guarantees homebuyer loans for qualified military service members, veterans, and their spouses. Borrowers can finance 100% of the loan amount with no down payment required. Other benefits include lower closing costs (which can be paid by the seller), better interest rates, and lack of PMI or MIP.

VA loans are best for eligible active duty military personnel or veterans and their spouses who want highly competitive terms and a mortgage product tailored to their financial needs.

Fixed-Rate Loans

Fixed-rate loans are best for people who plan to live in their homes for a long time. If you want to pay off your home faster and can afford a higher monthly payment, a short-term fixed-rate loan (for example, 15 or 20 years) helps you reduce time and interest payments and generate equity in your home much faster. Opting for a shorter fixed-term mortgage means that monthly payments will be higher than with a longer-term loan - so review the numbers to make sure your budget can handle the highest payouts.

You may also want to consider other goals such as saving for retirement or an emergency fund. When it comes to mortgages, there's no one-size-fits-all solution - so it's important to do your research and find out which type is right for you.

Rosanne Pacana
Rosanne Pacana

Disclaimer: The information provided on this website is for general informational purposes only and does not constitute financial, investment, or legal advice. Please consult with a qualified professional for personalized advice. We do not endorse or guarantee the products, services, or information provided by third-party links or advertisements on this website."