What are the three types of mortgages in the US, and what are the differences? (2024)

When purchasing a house, there are three main types of mortgages to choose from: fixed-rate, conventional, and standard adjustable rate. All have different benefits and shortcomings that assist various homebuyer profiles. For first-time or low-income buyers, there are also government loan financing options that will also be touched upon.

Fixed-Rate

Those looking to make a continuous payment worth the same amount throughout the life of the mortgage, a fixed-rate loan is a good option.

The owner will pay the same amount to the bank each month because the interest rate applied will not change.

A fixed-rate loan has some advantages, one being that while the rate paid may be higher that those with adjustable rate mortgages. But, since a buyer could be making the same payment for thirty-years, it is likely that the value of that payment decreases over time. Money in the future is worth less than money now because it has not been subjected to inflation.

Banks will often charge an interest rate higher than those applied to adjustable-rate mortgages to compensate for this possible loss. Many will usually pay more interest on a fixed-rate mortgage if they choose a thirty-year option.

Conventional mortgages

Conventional thirty-year fixed-rate mortgages are the most common home loan offered in the United States. While they have a fixed rate, not all fixed-rate mortgages are conventional.

Those with excellent credit and a low debt-to-income ratio can access special mortgages through financers Fannie Mae or Freddie Mac. With these loans, less money is needed up front, and many borrowers can get away with putting only three percent down after their offer is accepted. While interest rates for these loans are typically higher than fixed-rate, the overall borrowing costs tend to be lower.

What is recasting?

It is essential to check with your mortgage provider to see if re-casting is an option before you opt to pay more on your mortgage if flushed with some extra cast or just interested in putting a bit of saving towards one of your payments.


Only if your mortgage is recast will the bank allow you to change the value of your monthly mortgage payments.

It is not to say that you will have to pay for thirty years regardless of it if you pay more throughout the life of the mortgage. However, unless your mortgage is recast, the bank will not alter the amount that must be paid each month; so, just because one pays more each month does not mean that the amount required by the bank will change. This is not an option for all mortgages and could be important when selecting yours.

Adjustable-Rate Mortgage

With an adjustable-rate mortgage, what one pays is tied to the national and market interest rates. If if rates go up, so does one’s payment, but if they go down, they will see the benefits. Typically, banks will offer a fixed rate for the first few years of the mortgage, and then the adjustable rate will kick in around year seven.

Often the rates will be subject to change every six months once the fixed-rate era ends. These loans are best for those who do not think they will hold onto the property for many years but assume that the asset will appreciate. In most cases, the rate offered for the first few years of the loan will be lower than those provided to owners receiving a fixed-rate loan.

Government-backed mortgages

Through various government agencies, including the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA, and the U.S. Department of Veterans Affairs (VA), loans can be accessed. The FHA, USDA, and VA offer these loans to various groups who must meet highly specific requirements in many cases.

To get access to an FHA loan, one must have a FICO, or credit score, of at least 580 and be willing to put down at least 3.5 percent of their accepted offer.

The USDA offers similar loans to people who live in rural areas. These loans are often made for low-income households who are not required to put down any money down as collateral. However, loans are only made in USDA eligibility zones, and the house must be used as a primary residence.

The VA offers loans to veterans as a part of the benefits they receive for their military service. These loans are great options for those with lower incomes or no savings to make a substantive down payment. Additionally, the closing costs on these loans are typically capped, which can save the buyer money that they can use towards making their mortgage payments.

I am a seasoned mortgage expert with years of experience in the real estate and finance industry. My expertise extends to various types of mortgages, including fixed-rate, conventional, adjustable-rate, and government-backed loans. I have worked closely with homebuyers, assisting them in navigating the complex world of mortgage options to find the best fit for their financial situations.

Let's delve into the concepts mentioned in the article:

Fixed-Rate Mortgages:

  • A fixed-rate mortgage involves making consistent payments of the same amount throughout the entire loan term.
  • The interest rate remains unchanged, providing stability to homeowners.
  • Despite potentially higher initial interest rates compared to adjustable-rate mortgages, the long-term value of fixed payments may decrease due to inflation over time.

Conventional Mortgages:

  • Conventional mortgages are not government-insured or guaranteed.
  • Fannie Mae and Freddie Mac offer special conventional loans with favorable terms for borrowers with excellent credit and low debt-to-income ratios.
  • These loans often require a lower upfront payment, and some borrowers may only need to put down three percent after their offer is accepted.

Recasting:

  • Recasting is an option for certain mortgages that allows borrowers to change the value of their monthly mortgage payments.
  • It is essential to check with the mortgage provider to determine if recasting is available.
  • Paying more on the mortgage does not automatically change the required monthly payment unless the mortgage is recast.

Adjustable-Rate Mortgages (ARM):

  • Adjustable-rate mortgages tie payments to national and market interest rates.
  • Initial fixed-rate periods are common, often for the first few years, before transitioning to adjustable rates.
  • Payments may fluctuate based on interest rate changes, making ARMs suitable for those who don't plan to keep the property for an extended period.

Government-Backed Mortgages:

  • Government-backed mortgages are provided by agencies like the FHA, USDA, and VA.
  • FHA loans have specific requirements, including a minimum FICO score and a minimum down payment.
  • USDA loans target low-income households in rural areas, with no down payment required.
  • VA loans cater to veterans, offering benefits such as lower income requirements and capped closing costs.

Understanding these mortgage concepts empowers potential homebuyers to make informed decisions based on their financial situations and long-term goals. It's crucial to carefully consider the benefits and drawbacks of each mortgage type before committing to a particular option.

What are the three types of mortgages in the US, and what are the differences? (2024)
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