23 Types of Mortgage Loans and Refinances Explained

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

Best for: Homeowners who want a predictable mortgage payment for the entire term of the loan.

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 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.

Stability and predictability make 30-year fixed-rate mortgages the most popular type of home loan, with 90% of homebuyers choosing this option.[1]

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.

2. Adjustable-rate mortgages

Best for: Homeowners who can tolerate changes in their mortgage payment or don’t plan to stay in their home for the entire loan term.

An 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 that 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 would 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. These are the different types of caps:

• Initial adjustment cap: 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: How much your interest rate can change on each following adjustment. It’s typically about 2%.
• Lifetime adjustment cap: 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.

Conventional Mortgages

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.

3. Conforming mortgages

Best for: Borrowers who have a good credit score and need a home loan that meets federal standards.

Conforming mortgages are the most common type of home loan. They 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 and frees up resources for them to make additional loans. Fannie and Freddie package the loans they buy into investments and sell them on the secondary mortgage market.

The most important requirement for selling a loan to Fannie Mae or Freddie Mac is that it must conform to government limits, the main one being a maximum loan amount.

In 2023, that maximum loan amount for a single-family home in most parts of the country is $726,200. In certain high-cost markets, the maximum is a bit higher: $1,089,300 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.

Conforming loans also have minimum requirements for borrowers, such as a credit score of at least 620.

4. Nonconforming or jumbo mortgages

Best for: Borrowers who need a loan that exceeds the conforming limit.

Nonconforming mortgages don’t meet the federal standards that would allow them to be sold to Fannie Mae or Freddie Mac. With no federal 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, they can be expensive for borrowers. The higher loan amount typically translates into higher closing costs, but interest rates for jumbo loans usually are comparable with those for conforming loans.

Jumbo loans pose a greater risk for lenders, which usually require a more stringent underwriting process. Expect lenders to require more documentation to confirm that you have enough income to afford the monthly payment.

Government-Backed Mortgages

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 and upfront fees.

5. FHA mortgages

Best for: First-time homebuyers who need more-lenient credit score and down payment requirements.

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 with less cash on hand because the minimum required down payment can be as low as 3.5% of the purchase price. FHA mortgages also can be cheaper if you have a lower credit score. However, if you have good credit and can afford a larger down payment of more than 3%, a conventional mortgage likely will be cheaper.

FHA loans require all borrowers to buy mortgage insurance. They also are subject to loan limits that vary by county. To find FHA mortgage limits by location, check with the Department of Housing and Urban Development.

6. USDA mortgages

Best for: Low- to mid-income borrowers buying a home in a rural area.

The 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 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.

To see if you meet income and location requirements, check with the USDA’s website.

7. VA mortgages

Best for: Qualified veterans, military service members, and their spouses.

Veterans Affairs backs mortgages for 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 allow eligible buyers to purchase a home with either a low down payment or no down payment. They don’t require mortgage insurance, but you need to pay a 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.

Mortgages for Low-Income Buyers

Low-income buyers have access to specialized loan programs. Mortgages for low-income buyers typically have income caps. In some cases, you might find restrictions based on your profession.

8. Fannie Mae HomeReady mortgages

Best for: Borrowers with a credit score of at least 620 and a relatively low income.

Fannie Mae offers the HomeReady program to low-income homebuyers with a credit score of at least 620. If you are a borrower with the right income level, you may get a lower interest rate if your credit score is 680 or higher.

First-time homebuyers pursuing the HomeReady program must take a homeownership education course. Through the program, you can get into a home with a down payment of as little as 3%. Plus, you can tap into gifts or grants to cover your down payment and closing costs.

If the property has extra space, you might be able to use boarder or rental income to qualify for the loan. However, borrower income cannot exceed 80% of the area’s median income.

9. Freddie Mac Home Possible mortgages

Best for: Borrowers with low or very low income who can afford a regular mortgage payment.

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.

10. Good Neighbor Next Door mortgages

Best for: Professionals in qualifying public service industries who want to lock in a relatively affordable home purchase.

The Good Neighbor Next Door program is available through the Department of Housing and Urban Development. It offers professionals in certain occupations a 50% discount on the list price of homes in HUD’s inventory. The homes are located in specific revitalization zones.

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 for your budget. But you must agree to live in the property as your primary residence for at least three years.

Mortgage Refinancing

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.

There are many reasons to refinance, but people generally choose this route when it helps them save money.

11. Rate refinances

Best for: Homeowners paying an interest rate on their mortgage that’s higher than current market rates.

If interest rates have dropped since you first took out your mortgage, refinancing to a new loan with lower rate can reduce the amount you owe each month and how much you pay in overall interest.

12. Term refinances

Best for: Existing homeowners who want to adjust their mortgage repayment schedule.

If qualified, homeowners who want to pay off their loan sooner 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 will take more years to pay off and may cost you more in overall interest.

13. Interest type refinances

Best for: Owners looking for either long-term stability or short-term savings.

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.

14. Cash-out refinances

Best for: Homeowners who want or need to borrow cash to pay for major expenses.

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 receive 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, or cover other major expenses such as medical or education costs.

To see how refinancing could help you save money, check out our mortgage refinance calculator.

Second Mortgages

A second mortgage is an additional home loan that you take out alongside your primary mortgage. With a second mortgage, you use your home as collateral to gain access to additional funds. Second mortgages typically come with higher interest rates compared to the primary mortgage.

15. Piggyback mortgages

Best for: Buyers up against their borrowing limit who can benefit from multiple loans.

A piggyback loan is a type of second mortgage that you obtain when financing your home purchase. Essentially, these second mortgages are either a home equity loan or a home equity line of credit. But accessing the loan funds upfront can help a borrower make a bigger down payment or reduce the amount needed for their primary loan.

16. Home equity loans

Best for: Homeowners who want to borrow a lump sum from their home equity.

Second mortgages often come in the form of a home equity loan. Through this loan, you’ll receive the money in a lump sum at a fixed interest rate. The repayment schedule is broken into regular monthly payments.

17. Home equity lines of credit

Best for: Homeowners who want to borrow cash from their home equity as needed.

A home equity line of credit is another style of second mortgage. Through a HELOC, you’re able to withdraw cash up to a maximum amount, subject to an adjustable interest rate. It works much like a credit card, with your loan amount as the credit limit. Many HELOCs have an initial period when withdrawals are allowed. After the withdrawal period ends, you likely will need to start making regular monthly payments.

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.

18. Balloon mortgages

Best for: Buyers who want a lower monthly payment and either can afford a large final payment or plan to sell or refinance before the loan is fully repaid.

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.

19. Interest-only mortgages

Best for: Buyers who need a lower payment now and expect their income to increase over time.

Interest-only mortgages are a type of balloon mortgage, where the borrower pays 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.

20. Construction mortgages

Best for: Borrowers who want to build their own home.

Construction mortgages are for prospective homeowners looking 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 a new mortgage to buy the finished home.

21. Renovation and rehabilitation 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.

The FHA offers 203(k) rehab loans to help borrowers save time and money if they are buying a home that needs repairs. Instead of two separate loans, 203(k) loans are a single mortgage with either a fixed or adjustable rate, and can be used to cover 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.

22. Mobile- or manufactured-home loans

Best for: Buyers who want to purchase a manufactured or mobile home.

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.

23. Reverse mortgages

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.

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 they no longer live in that home as their primary residence. Often, borrowers pay off the reverse mortgage by selling their home after they move out.

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 any loved ones.

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 your 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 20% 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 on living there 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 field mortgage at Navy Federal Credit Union in Vienna, Virginia.
• Shop around. Before you commit to a lender, make sure to compare several quotes. You also can use our free mortgage comparison tool. “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.”

The Bottom Line on Different Types of Mortgages

The good news is that there are many different types of home loans available that can help make your homebuying dreams come true. The trick is understanding the nuances of the different mortgage types, along with the pros and cons associated with each. With this information on hand, you can get that much closer to selecting a mortgage that’s right for your current and future financial situation.

Sarah Sharkey contributed to the reporting of this article.