When looking to buy a home, there’s a lot to consider, like finding the right house in the right neighborhood. Of course, it’s just as important to figure out what you can afford and how you’re going to pay for it.

To help you begin exploring your options, we’ve compiled a list of different types of home loans and what you need to consider when preparing to buy.

Fixed-Rate Mortgages

The traditional fixed-rate mortgage is the most common type of home loan, where monthly principal and interest payments remain the same for the life of the loan.

Fixed-rate mortgages are available in terms ranging from 10-30 years and can be paid off at any time without penalty. This type of mortgage is structured (or “amortized”) so that it will be completely paid off by the end of the loan term.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARM) are loans whose interest rate can vary during the loan’s term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions.

The initial rate on an ARM is lower than on a fixed-rate mortgage, which allows you to purchase a more expensive home. Adjustable-rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from one month to 10 years.

Interest-Only Mortgages

A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. At the end of the interest-only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest-only period, the larger the new payment will be when the interest-only period ends.

Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. (However, most borrowers repay their mortgages well before the end of the full 30-year loan term.)

Graduated-Payment Mortgages

A graduated-payment mortgage is a loan where the payment increases each year for a predetermined amount of time (such as 5 or 10 years), then becomes fixed for the remaining duration of the loan.

When interest rates are high, borrowers can use a graduated-payment mortgage to increase their chances of qualifying for the loan because the initial payment is less.

The downside of opting for a smaller initial payment is that the interest owed increases and the payment shortfall from the initial years of the loan is then added on to the loan, potentially leading to a situation called “negative amortization.” Negative amortization occurs when the loan payment for any period is less than the interest charged over that period, resulting in an increase in the outstanding balance of the loan.

FHA Home Loans

FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single-family and multi-family homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn’t issue loans or set interest rates, it just guarantees against default.

FHA loans allow individuals who may not qualify for a conventional mortgage to obtain a loan, especially first-time homebuyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.

VA Loans

The VA Loan provides veterans with a federally guaranteed home loan that requires no down payment. This program was designed to provide housing and assistance for veterans and their families. The Veterans Administration provides insurance to lenders in the case that you default on a loan. Because the mortgage is guaranteed, lenders will offer a lower interest rate and better terms than a conventional home loan. A VA loan may also have reduced closing costs and no prepayment penalties.

Additionally, there are services that may be offered to veterans in danger of defaulting on their loans. VA home loans are available to military personal that have either served 181 days during peacetime, 90 days during war, or the spouse of a serviceperson either killed or missing in action.

USDA Loans

USDA loans are low-interest mortgages with zero down payments designed for low-income Americans who don’t have good enough credit to qualify for traditional mortgages. You must use a USDA loan to buy a home in a designated area that covers several rural and suburban locations.

Jumbo Loans

A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan is $548,250 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan.

Also called non-conforming conventional mortgages, jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by Fannie and Freddie, meaning the lender is not protected from losses if a borrower defaults. Jumbo loans are typically available with either a fixed interest rate or an adjustable rate, and they come with a variety of terms.

Want to learn more?

When you’re ready to find the best loan for your situation, you can contact us directly or complete our secure, no-obligation online mortgage application.