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Mortgage loan types

Decoding the Difference Between Mortgage Loan Types

Resources / August 30, 2022

Home loans can be very tricky. Even ones that seem straightforward can have a lot of nuance, and there’s a variety of mortgage loan types that fit different needs.

Understanding the differences between these loan types is crucial for setting your home search on the right foot. That’s why you need a home loan expert to guide you on your journey.

At First Mortgage Direct, we’re dedicated to guiding clients throughout the home- buying process. Our experienced mortgage professionals have the knowledge to create tailored loan solutions for any situation.

Before settling on a home loan, read through this blog from our home loan experts to learn more about the different mortgage loan types. You can also always reach out to our mortgage professionals at any time for direct, personal ized advice.

Spot the difference: Mortgage loan types

To the untrained eye, mortgage loans can seem very similar. Yet the four types of mortgage loans—fixed-rate mortgages, adjustable-rate mortgages, FHA loans, and VA loans—all serve different purposes.

Even within each mortgage loan type, there are subtle differences that can make a big difference in your home loan.

Fixed-rate mortgages

With a fixed-rate mortgage, your loan’s interest rate is locked in place (or fixed) for the entire life of the loan. The loan’s static nature makes it ideal for a wide range of situations, which is part of why they are the most popular type of mortgage loan in the United States.

Every month your payment will be roughly the same, give or take some fluctuation due to local taxes or homeowners insurance. Your principal and interest rate remain steady the life of your loan term.

Our FMD mortgage loan officers typically recommend a fixed-rate mortgage for someone who wants to be in a home for a while. If you’re looking to put down roots, start or build your family, have a steady job that you don’t foresee leaving anytime soon. It takes out most volatility from your monthly payment.

Fixed-rate mortgages can be quite nuanced, given they’re a lengthier mortgage loan. Most conventional fixed-rate mortgage loans last 30 years, but there are also shorter-term options.

Qualifications

There is no special qualification to apply for a fixed-rate mortgage. There are some barriers, however, such as lower credit scores leading meaning higher interest rates. Most lenders require a credit score of at least 620-640 to apply for a conventional fixed-rate mortgage.

Related: What’s the best credit score for buying a house?

Adjustable-rate mortgage

If “fixed” in mortgage jargon means “stays in place the whole time,” then “adjustable” in this case is the exact opposite. An adjustable-rate mortgage is a home loan in which the interest rate can change based on a specific schedule, typically after a “fixed period.”

The inherent risk of this kind of loan is that once the fixed period is over, your monthly payment will fluctuate with the interest rate market. So say you sign up for a one-year adjustable rate mortgage on a 30-year loan, you would pay a different monthly payment every year when the rate resets.

For potential homeowners looking for more flexibility but a longer fixed period, there are hybrid options available. These hybrid mortgages allow for fixed periods as long as 10 years. This is perfect for new homeowners who know they will likely look to upgrade within the first 10 years of their loan. Also ideal for people who have careers that move them around the country every few years.

Qualifications

There are no specific qualifications for an adjustable-rate mortgage.

FHA loans 

An FHA loan is a mortgage backed by the United States government to help make homeownership possible for borrowers who don’t have the means for a large down payment or excellent credit.

These are for potential homeowners with financial difficulties. It gives your lending agency flexibility in underwriting standards, so borrowers who might not qualify for other mortgages have a higher chance of becoming homeowners. FHA loans do require mortgage insurance, however, which protects the lender from a loss if the borrower defaults.

Qualifications

Borrowers can qualify for an FHA loan with a minimum of a 500 credit score with a 10% down payment, but a 3.5% down payment is acceptable for 580 credit scores and above. Here are a few other FHA loan qualifications:

  • Verifiable employment history for the last two years
  • Verifiable income through pay stubs, federal tax returns, and bank statements
  • Loan is for a primary residence

Related: How much money do you need to buy a house?

VA Loans

VA home loans are one of the major benefits our country provides for veterans. They include no required down payments, lower interest rates, no private mortgage insurance, and limited to no closing costs.

For more than seven decades, lenders have served our nation’s veterans with affordable loans. We’re proud to provide veterans with quality mortgages at FMD, as well as advice on their entire home buying journey.

Qualifications

All uniformed service members are eligible for VA home loan benefits, including members of the Army, Navy, Air Force, Marines, Coast Guard, Space Force, National Oceanic Atmospheric Administration (NOAA), and Public Health Service.

More on VA loans at FMD

Find your perfect mortgage fit at FMD

Buying a home is one of the biggest financial decisions of your life. It’s important to have the right team to support you throughout the process.

Our experienced mortgage professionals at First Mortgage Direct are passionate about helping our clients with their first steps toward a better future.

Unlike other online mortgage lenders, our loan officers won’t try to fit you into a loan that’s not right for your situation. We are seasoned professionals in this industry with the experience to guide clients through the different mortgage loan types. The end result leaves them satisfied with their purchase and confident in their decisions.

Contact us today to see how our honesty, integrity, and experience can help with finding you the right home loans.

A special thank you to our Mortgage Loan Originator, Don Baker, for providing his expertise on this topic.