A Guide to 6 Different Types of Home Loans and How To Choose the One for You

house for sale — (Photo : Photo by Tim Boyle/Getty Images)

Purchasing a home is a major financial decision, and choosing the right mortgage is a critical in ensuring a smooth homebuying process. With several types of home loans available, it can be overwhelming to determine which one best suits your needs and financial situation.

In this guide, we'll explore six different types of home loans and provide insights on who each loan is best suited for, making it easier for you to make an informed decision.

Fixed-Rate Loan

A fixed-rate mortgage is a popular choice for many homebuyers. As the name suggests, the interest rate remains constant throughout the loan term, typically ranging from 15 to 30 years. This type of loan offers predictability and stability, as your monthly payments will stay the same, making it easier to budget and plan for the long term.

Who It's For

Fixed-rate loans are ideal for individuals who value consistency and want to lock in a specific interest rate for the duration of the loan. This option is particularly attractive for those who plan to stay in their home for an extended period, as it eliminates the risk of interest rate fluctuations.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage (ARM) is a loan with an interest rate that can change periodically, typically annually or every few years. The initial interest rate is usually lower than fixed-rate mortgages, but it can increase or decrease over time based on market conditions and current interest rates. This means if interest rates go higher, your monthly payments will also increase. If interest rates fall, so do your payments.

Who It's For

ARMs are suitable for borrowers who expect to move or refinance within a few years. They can be a cost-effective option for those who plan to stay in their home for a shorter period and are comfortable with the potential risk of rising interest rates. It is also the best option for buyers with low or poor credit scores.

Federal Housing Administration (FHA) Loan

FHA loans are insured by the Federal Housing Administration and are designed to make homeownership more accessible for borrowers with lower credit scores or limited funds for a down payment. FHA loans typically require a down payment of only 3.5%, compared to the usual 20% down payment requirement in other loans. It also has more flexible credit requirements compared to conventional loans.

Who It's For

FHA loans are ideal for first-time homebuyers, individuals with less-than-perfect credit histories, or those with limited funds for a down payment. They provide an opportunity for homeownership to those who may not qualify for a conventional mortgage.

Veterans Affairs (VA) Loan

VA loans are backed by the U.S. Department of Veterans Affairs and are available to active-duty military personnel, veterans, and eligible surviving spouses. These loans offer several benefits, including no down payment requirement and no private mortgage insurance (PMI).

Who It's For

VA loans are exclusively for eligible military members, veterans, and their families. To be eligible, an individual must have served 90 days consecutively during wartime, 180 days during peacetime, or six years in the reserves. They provide an affordable path to homeownership for those who have served or are currently serving in the armed forces. However, the house of choice must meet certain property requirements. Fixer-upper properties are not allowed.

USDA Rural Development Loan

USDA loans are guaranteed by the U.S. Department of Agriculture and are designed to help low-to-moderate-income individuals purchase homes in eligible rural areas. These loans require no down payment and offer competitive interest rates.

Who It's For

USDA loans are suitable for individuals with low-to-moderate income who plan to purchase a home in an eligible rural area. That being said, their debt load must not exceed their income by more than 41%.

Bridge Loan

A bridge loan is a short-term financing option that helps homebuyers "bridge" the gap between the purchase of a new home and the sale of their existing property. These loans are typically used to cover the down payment and closing costs for the new home until the proceeds from the sale of the current home are available.

Who It's For

Bridge loans are ideal for homebuyers who need to purchase a new home before selling their current residence. They provide a temporary financial solution for those who require funds to make a down payment or cover closing costs while waiting for the sale of their existing property.