What are the differences between the five types of mortgages?

The housing market, like much of the economy, has endured a turbulent couple of years during the pandemic. The lockdown and subsequent reopening of business across the country brought about a period of high inflation and high interest rates not seen in four decades.

At the start of 2022 interest rates were so low that it opened up the possibility of home-ownership to many more people, causing a rush to snap up properties. That trend only served to overheat the housing market however and typical property prices have reached record levels in many parts of the country.

This week the Federal Housing Finance Agency (FHFA) upped the backstop mortgage eligibility threshold to allow $1 million homes for the first time, a key sign that house prices have risen considerably.

This all means that prospective homeowners will need to make the most of the very best mortgage deals they can find, or face a very expensive mortgage agreement. If you are considering taking the plunge, we take a look at the five types of mortgage available in the US…

Conventional loans

These are loans not backed by the federal government, meaning you are at the mercy of the markets to find a package that suits you. They can be split into conforming and non-conforming loans.

Conforming loans are required to satisfy the standards put in place by the Federal Housing Finance Agency (FHFA), relating to credit, debt and loan size. Non-conforming loans do not necessarily meet FHFA standards, and are typically reserved for larger homes or offered to borrowers with insufficient credit scores.

Jumbo loans

Another type to fall outside of FHFA limits are jumbo loans, which are often found in areas of high-cost real estate, like New York City, Los Angeles and San Francisco. They can allow home-buyers to secure the money needed to buy a more expensive house, but typically require a larger down payment; sometimes as much as 20%.

Government-insured loans

Although the US government does not offer mortgages, it is involved in lending to home-owners. The Federal Housing Administration (FHA loans), the Department of Agriculture (USDA loans) and the Department of Veterans Affairs (VA loans) all provide backing for mortgages.

They are often designed to offer financing to those who would not qualify for a conventional loan and are more relaxed on the credit requirements. However they have lower limits than most other types of mortgages, limiting the options for the buyer.

Fixed-rate mortgages

If you want stability in your housing arrangement, a fixed-rate mortgage may be the best option for you. Fixed-rate mortgages keep the same interest rates over the whole life of your loan, ensuring that the monthly mortgage repayment remains the same.

This allows borrowers to more accurately budget for their other expenses because they will know exactly how much they are going to be spending on their mortgage payments. However, the interest rates are generally slightly higher.

Adjustable-rate mortgages (ARMs)

The opposite of fixed-rate is adjustable-rate mortgages, which have fluctuating interest rates. Often they come with a fixed rate for the first few years but will be subject to market forces after the fixed period elapses.

Typically the terms for these mortgages are expressed in the form ‘X-year/Y-month ARM’ - meaning that the rate will remain the same for the first X years, before being adjusted for inflation every Y months after that initial period.