Selecting the right mortgage loan can be complicated, especially if you qualify for multiple options. This post outlines the most common types of mortgages to help you make a more informed decision about your next home loan.

Types of mortgage loans

Conventional loans

Conventional loans are the most popular type of mortgage, provided by private lenders such as banks, credit unions, and mortgage companies and classified as either "conforming" or "non-conforming."

A conforming loan meets standards set by the Federal Housing Finance Agency (FHFA) and is eligible for sale to Fannie Mae or Freddie Mac (government-sponsored enterprises that buy mortgage loans from private lenders and then sell them as securities to investors).

For 2025, FHFA defines conforming loans as those valued at less than $806,500 ($1,209,750 in designated higher-cost areas). Additional criteria include credit scores and debt-to-income ratios. While standards vary by lender, borrowers generally need a credit score of at least 620 and a debt-to-income ratio below 43% to qualify.

Non-conforming loans, on the other hand, don't meet FHFA standards and therefore are not able to be sold to Fannie Mae or Freddie Mac. These are considered riskier for lenders, typically dictating borrowers pay higher interest rates.

Fixed-rate mortgages

Fixed-rate mortgage interest rates remain static throughout the life of a loan, meaning the amount you pay in the first month equals what you pay in the hundredth month and beyond.

The most common terms for fixed-rate mortgages are 15, 20, or 30 years; the shorter the term, the lower the interest rate (generally speaking). As a result, you'll typically pay less interest over the life of a 15-year fixed-rate mortgage compared to its 30-year counterpart. Keep in mind, however, that monthly payments on a 15-year mortgage are often significantly higher.

Fixed-rate mortgages are ideal for homebuyers who want predictable monthly payments, plan to stay in their home for an extended period of time, and seek protection from rising interest rates—especially when buying in a low-rate environment. Note that fixed-rate mortgages typically have a higher initial interest rate than adjustable-rate mortgages (ARMs); qualifying for the former, therefore, is sometimes more challenging due to these higher payments.

Fixed-rate loans are either conforming or non-conforming depending on the aforementioned criteria.

Adjustable-rate mortgages

Adjustable-rate mortgages (ARMs), meanwhile, are typically 30-year loans that have variable interest rates and feature an introductory rate that's fixed for an initial period of time—typically 1 to 10 years—and generally lower than that of a fixed-rate mortgage. Mortgage interest rates can fluctuate following the introductory period based on market conditions, meaning the monthly payment amount may change as well.

Lenders often advertise ARMs using number configurations (e.g., 5/1 or 7/1), with the first number indicating how long the introductory rate will remain fixed (the duration of stability) and the second indicating how frequently the interest rate can change following the introductory period. Take a 5/1 ARM, for example, wherein the introductory rate is fixed for 5 years and can change annually thereafter. A 6 takes the place of the 1 in some cases, meaning the rate will adjust every 6 months after the introductory period.

Adjustable-rate mortgages (ARMs) are ideal for borrowers who prefer smaller payments during the initial years of their loan and for those buying in a declining interest rate environment, reducing the need for refinancing—at least early on, that is.

Adjustable-rate loans are either conforming or non-conforming depending on the criteria outlined earlier.

Jumbo mortgages

Jumbo mortgage loans are a type of non-conforming loan available as both fixed and adjustable-rate options. They're specifically designed for borrowers in high-cost real estate markets—exceeding loan limits of $766,550 or $1,149,825 in higher-cost areas for 2025—and typically require higher credit scores (typically 700+) as well as larger down payments that generally range from 10% to 20%. Keep in mind that some lenders don't offer jumbo loans.

Government-backed loans

There are three types of government-backed mortgage loans: FHA, VA, and USDA options. These are a great option for eligible buyers who may lack a large down payment or struggle to meet minimum credit standards.

While FHA loans offer lower qualifying prerequisites and require only a 3.5% down payment, borrowers must pay mortgage insurance premiums to protect the lender in case of default—with allowed loan amounts lower compared to conventional loans. These loans are an excellent option for those who don't qualify for conventional financing.

VA loans, meanwhile, are available to active service members, veterans, and surviving spouses and don't require a down payment, minimum credit score, or mortgage insurance (though a funding fee is due at closing).

Finally, USDA loans are designed to help low to moderate-income individuals purchase homes in eligible rural areas and also don't require a down payment or minimum credit score (though guarantee fees are required at closing).

Construction loans

Just as the name implies, construction loans are used to finance new home construction and typically convert to permanent loans upon completion. While borrowers may only need to make interest payments during the construction phase, a higher down payment is sometimes required (with the interest rate eclipsing that of a conventional mortgage).

Interest-only mortgages

Interest-only mortgage loans task borrowers with making (yes) payments on interest only for a specified period of time (typically 5 years), after which both principal and interest payments begin. These loans are sometimes beneficial for individuals who plan to stay in their home for a few years, though this means they may not build much (or any!) equity by the time they sell. They're also suitable for those who anticipate the ability to afford both principal and interest payments once this is triggered.

Balloon mortgages

Available to homeowners aged 62+, reverse mortgages allow individuals to tap into their home equity and receive tax-free payments from lenders as a source of income. When the home is sold or the homeowner passes away, proceeds from the sale are then used to repay the balance.

How to choose the right type of mortgage

There are several important factors to consider when choosing a mortgage loan, including:

· Loan eligibility based on credit: Which types of loans do you qualify for based on your credit score? Those with a low credit score may have limited options.

· Debt-to-income ratio: What is your debt-to-income ratio? If it's too high, you may not qualify for a mortgage loan and thus want to consider delaying your purchase until you’ve paid off some debts.

· Down payment funds: How much money do you have available for a down payment? You may need to choose a loan that offers lower down payment requirements (e.g., an FHA loan).

· Risk tolerance: What is your risk tolerance? If you opt for an adjustable-rate mortgage, you risk seeing increased payments in the future.

· Duration of stay: How long do you plan to stay in the home? A "starter home," for example, might call for an adjustable-rate or interest-only mortgage.

· House affordability: Regardless of how much money a lender is willing to lend you, you need to know how much home you can truly afford while keeping in mind any future repairs, maintenance, furniture purchases, and/or renovations.

Additional information to obtain from your mortgage lender

Be sure to understand the following terms when shopping around for your mortgage:

· Pre-approvals: A pre-approval letter specifies the exact amount you're qualified to borrow. This differs from a prequalification letter—a simpler evaluation based on self-reported income not involving a hard credit inquiry—and is thus a more effective way to show sellers you're a serious buyer.

· Origination fees: Lenders impose these charges (typically 0.5% to 1% of your total loan) to process your loan application, with these fees usually paid as part of closing costs and sometimes negotiable. Not all lenders charge origination fees, so shop around for the best deal.

· Discount points: These one-time fees are paid directly to the lender in exchange for a lower mortgage interest rate, so be sure to ask if any points are required when receiving a quote.

· Interest rate lock: Locking in interest secures the current rate while you're in the home-buying process, protecting you from potential increases by the time you close on your home. You can typically lock in a rate for 30 to 60 days, though this service sometimes involves extra fees.

· Private mortgage insurance (PMI): PMI, a type of insurance required on conventional loans with a down payment less than 20% of the purchase price, is generally added as a monthly mortgage premium until you have 20% equity in your home.

· Interest rate vs. APR: Know the difference between the interest rate and APR advertised on your home loan as not all lenders include all fees in the APR calculation (so comparing these figures is sometimes misleading if you're not privy to included fees).

In sum: the most common types of mortgage loans

If you’re embarking on a home-buying adventure, congratulations! While home ownership is most certainly a hallmark of the American dream, be sure to understand your mortgage loan options and choose the best type for you so you can fully enjoy having a home to call your own after crossing the finish line.

Have questions about the home-buying process? Schedule a FREE discovery call with one of our CFP® professionals!

The Most Common Types of Mortgage Loans for Homebuyers