Unless you can buy your home entirely in cash, finding the right property is only half the battle. The other half is choosing the best type of mortgage. You’ll likely be paying back your mortgage over a long period of time, so it’s important to find a loan that meets your needs and budget.

When you borrow money from a lender, you’re making a legal agreement to repay that loan over a set amount of time with interest.

Choose the Best Mortgage For You

Choosing the best mortgage is not a simple task. It’s crucial to decide which type is the best fit for your needs, or you may be regretting your choice for some time to come. Fortunately, we've provided detailed descriptions of the different types of mortgages you can get. This lets you choose which option will work best in your coming years of homeownership.

Defining Mortgage

There are two components to your mortgage payment, these are principal and interest. The principal refers to the loan amount. Interest is an additional amount, calculated as a percentage of the principal that lenders charge you for the privilege of borrowing money that you can repay over time. During your mortgage term, you pay in monthly installments based on an amortization schedule set by your lender.

The Six Main Types of Mortgages

Not all mortgage products are created equal. Some have more stringent guidelines than others.

Some lenders might require a 20% down payment, while others require as little as 3% of the home’s purchase price. To qualify for some types of loans, you need pristine credit. Others are geared toward borrowers with less-than-stellar credit.

Conventional Mortgages

A conventional loan is a loan that is not backed by the federal government. Borrowers with good credit, stable employment and income histories, and the ability to make a 3% down payment can usually qualify for a conventional loan. To avoid needing 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.

Conforming Mortgage Loans

Conforming loans are bound by maximum loan limits set by the federal government. These limits vary by geographic area.

Nonconforming Mortgage Loans

Nonconforming loans generally can’t be sold or bought due to the loan amount or underwriting guidelines. Jumbo loans are the most common type of nonconforming loans. They’re called jumbo because the loan amounts typically exceed conforming loan limits. These types of loans are riskier to a lender, so borrowers typically must show larger cash reserves, make a down payment of 10% to 20% (or more), and have strong credit.

Government-Insured Federal Housing Administration (FHA) Loans

Low to moderate income buyers purchasing a house for the first time typically turn to loans insured by the Federal Housing Administration (FHA) when they can’t qualify for a conventional loan. Borrowers can put down as little as 3.5% of the home’s purchase price. FHA loans have more-relaxed credit score requirements than conventional loans.

However, the FHA doesn't directly lend money. It guarantees loans by FHA-approved lenders. There is one drawback to FHA loans. All borrowers pay an upfront and annual mortgage insurance premium (MIP). FHA loans are best for low to moderate income borrowers who can’t qualify for a conventional loan product or anyone who cannot afford a significant down payment.

Government-Insured Veterans Affairs Loans

The U.S. Department of Veterans Affairs (VA) guarantees homebuyer loans for qualified military service members, veterans, and their spouses. Borrowers can finance 100% of the loan amount with no required down payment. Other benefits include fewer closing costs that may be paid by the seller if agreed upon during the negotiations. VA loans do require a funding fee, a percentage of the loan amount that helps offset the cost to taxpayers. The funding fee varies depending on your military service category and loan amount.

Government-Insured U.S. Department of Agriculture Loans

The U.S. Department of Agriculture (USDA) guarantees loans to help make homeownership possible for low-income buyers in rural areas nationwide. These loans require little to no money down for qualified borrowers, as long as properties meet the USDA’s eligibility rules. We have to save this for the next post.

In sum, USDA loans are best for homebuyers in eligible rural areas with lower household incomes, little money saved for a down payment, and who can’t otherwise qualify for a conventional loan product.

Fixed-Rate Mortgages

Mortgage terms, including the length of repayment, are a key factor in how a lender prices your loan and your interest rate. Fixed-rate loans are what they sound like: a set interest rate for the life of the loan, usually from 10 to 30 years. If you want to pay off your home faster and can afford a higher monthly payment, a shorter-term fixed-rate loan (say 15 or 20 years) helps you shave off time and interest payments. You'll also build equity in your home much faster.

Opting for a shorter fixed-term mortgage means monthly payments will be higher than with a longer-term loan. Crunch the numbers to ensure your budget can handle the higher payments. You may also wish to factor in other goals, such as saving for retirement or an emergency fund.

Fixed-rate loans are ideal for buyers who plan to stay put for many years. A 30-year fixed loan might give you wiggle room to meet other financial needs. However, if you have the appetite for a little risk and the resources and discipline to pay your mortgage off faster, a 15-year fixed loan can save you considerably on interest and cut your repayment period in half.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) have a fixed rate for an initial period of up to 10 years, but after that period expires the rate fluctuates with market conditions. These loans can be risky if you’re unable to pay a higher monthly mortgage payment once the rate resets. Crunch the numbers to ensure that you can potentially handle any payment increases up to that point. Don't count on being able to sell your home or refinance your mortgage before your ARM resets because market conditions and your finances could change.

ARMs are a solid option if you don't plan to stay in a home beyond the initial fixed-rate period or know that you intend to refinance before the loan resets. Why? Interest rates for ARMs tend to be lower than fixed rates in the early years of repayment, so you could potentially save thousands of dollars on interest payments in the initial years of homeownership.

First-Time Assistance Programs

Special programs sponsored by states or local housing authorities offer help specifically to first-time buyers. Many of these programs are available based on buyers’ income or financial need. These programs, which usually offer assistance in the form of down payment grants, can also save first-time borrowers significant money on closing costs.

Mortgages for First-Time Buyers

All these loan programs (with the exception of first-time homebuyer assistance programs) are available to all homebuyers, whether it’s your first or fourth time purchasing a home. Many people falsely think FHA loans are available only to first-time buyers, but repeat borrowers can qualify as long as the buyer has not owned a primary residence for at least three years leading up to the purchase.

Choosing the loan that's best for your situation relies primarily on your financial health: your income, credit history and score, employment, and financial goals. Mortgage lenders can help analyze your finances to help determine the best loan products. They can also help you better understand the qualification requirements, which tend to be complex.

In closing, if you plan on buying a home and actually staying there for 10 years or longer, consider a fixed-rate mortgage. If you plan to sell earlier, say within five years, an adjustable-rate mortgage may make more sense for you. To determine the type of mortgage that's right for you, lean on a lender you can trust. Ask friends for recommendations to find the best financial professional who can partner with you on this very important journey.