Home loan options can be bewildering. Do you need an interest-only loan, a conventional fixed loan, an FHA loan, or a VA loan? When looking for your dream home, there are a lot of home loan products to choose from. We'll break down the eight most popular types of mortgages so you can make an informed decision and get started on making homeownership a reality.

Who are Fannie Mae and Freddie Mac?

You'll hear these two names often when researching loans for a new home or refinancing a loan. Let's meet these two and learn their essential role in mortgages.

Fannie Mae

The Federal National Mortgage Association (FNMA), more commonly called Fannie Mae, is a government-sponsored enterprise (GSE). Fannie Mae purchases mortgage loans from larger financial institutions and backs them for borrowers considered low—or median-income. Fannie Mae-backed loans are usually conventional.

Freddie Mac

Federal Home Loan Mortgage Corporation (FHLMC), more well-known as Freddie Mac, purchases loans from smaller banks and credit unions. Most FHLMC-backed loans are conventional.

If it is important to know where your mortgage comes from, either a big bank or a smaller credit union, understanding the differences between Freddie Mac and Fannie Mae will help when talking with your lender.

1. Conventional fixed-rate loans

Conventional loans are a popular loan option for consumers. These loans are not backed by the federal government, like an FHA or VA loan (more on these two later). A fixed-rate loan will mean no rate fluctuation; it is fixed. Conventional loans are often categorized as non-conforming and conforming.

Conventional conforming loans

• Conform to a set of standards established by the Federal Housing Finance Agency (FHFA).

• They tend to have higher interest rates than FHA and VA loans.

• You'll need to complete a mortgage application through a private lender or government-sponsored organizations such as Fannie Mae and Freddie Mac.

Conventional non-conforming loans

• Any loan that does not conform to the standards established by FHFA.

• This can include jumbo loans (a large loan that will exceed loan limits set by FHFA) and government-backed loans such as FHA and VA.

Pros

• They are used for a first or second home or investment property.

• Borrowing costs are lower than most other types of mortgages.

• You'll have the same payments throughout the loan.

• You can cancel private mortgage insurance (PMI) when you achieve 20% equity.

Cons

• A higher FICO credit score is needed.

• A higher down payment is needed.

• You will need PMI if a down payment is less than 20%.

Conventional fixed-rate terms

Conventional fixed-rate terms vary from 10 to 40-year durations. 15 and 30 are the most popular.

Bottom line

A conventional fixed-rate loan is good if you have a healthy credit score and can afford a sizeable down payment.

2. Adjustable-rate mortgage

Adjustable-rate mortgages (ARMs) have an adjustable rate. This means you start with a lower interest rate, but the rate may go up or down at some point. Interest rates rise and fall due to supply and demand. When the supply of credit increases, interest rates drop. Higher interest rates mean that the supply of credit is decreasing. All interest rates are reset at specific intervals and applied to the mortgage balance.

Pros

• This may be a good option if you plan on paying off the mortgage or selling within a short period.

Cons

• The most significant risk to adjustable-rate mortgages is that monthly payments could grow unaffordable, putting you at risk of losing your home or getting into debt.

Bottom line

An ARM might be a good option if you will only live in the area for a short time or plan to sell the house before the interest rate increases. However, be aware that ARM interest rates could soar, making paying your mortgage every month a hardship. Think carefully about taking on an adjustable-rate mortgage. 

3. Interest-only mortgage

Interest-only mortgages appeal to borrowers because they allow them to pay only the loan's interest. At first, you may have low monthly payments, but you'll start paying both the principal and the interest after the interest-only period ends. Plus, interest-rate-only loans are ARMs, meaning the payment will be higher if interest rates rise even during the interest-only period.

Pros

• The interest-only period lasts ten years.

• Low monthly payments.

• Could pay off a loan faster.

Cons

• The interest-only period lasts ten years.

• Low payments are only temporary.

• It can be hard to qualify because you need a high credit score.

• The interest rates are variable.

• You won't build equity until you are out of the interest-only period.

Bottom line

An interest-only mortgage might be a good option if you don't plan on owning the home for an extended period. Talk with a lending expert to learn about interest-only mortgages.

4. FHA loan

A Federal Housing Administration (FHA) mortgage loan is government-backed, meaning that it is insured by a federal agency such as FHA, the U.S. Department of Agriculture (USDA), or the Veterans Administration (VA). FHA loans are a flexible choice for first-time home buyers and those with lower credit scores.

Pros

• No large down payment is required.

• Relaxed credit qualifications.

• A higher debt-to-income ratio is accepted.

• Some closing costs can be financed.

• Friendly to first-time homebuyers.

• Suitable for those who can't qualify for a conventional loan.

• A bankruptcy or foreclosure is not a disqualification.

Cons

• There are loan limits to FHA loans.

• It can come with higher interest rates.

• It cannot be used for investment properties.

• Mortgage insurance is non-negotiable.

• Home appraisals go through a strict process before a loan is approved. 

Bottom line

It's important to note that FHA loans are less attractive to sellers if you're trying to buy a home in a hot seller's market. FHA loans can cause delays and be viewed as risky, and having an FHA loan could mean losing out to a conventional loan holder. 

FHA loans are a flexible choice for potential home buyers. If your credit score is not great, FHA might be a loan program you should research first. 

5. VA loan

VA (Veteran's Administration) loans are for eligible active-duty military members, surviving spouses, and veterans. If you fit these requirements, VA loans could be a great option. As with any loan program, it is essential to look over all your options. There may be other options outside of a VA loan that could give you an even better rate and save you even more money.

Pros

• Lower rates.

• Flexible financing.

• Relaxed credit requirements.

• No down payment is required.

• No mortgage insurance is needed.

• It is a good choice for those in bankruptcy or foreclosure.

Cons

• VA funding fees are required (but can be financed into the loan).

• Cannot waive an inspection or appraisal.

• Sellers can find VA loans less desirable than conventional ones.

• You cannot use a VA loan for investment or vacation properties.

Bottom line

Like FHA loans, some sellers find VA loans a deal-breaker. Sellers may find the strict guidelines confusing, the closing process too long, and other issues. Also, if the home is in a hot market, a VA loan may be passed over for a more conventional loan with fewer restrictions or requirements to process.

6. USDA mortgage

The USDA backs USDA loans for families buying homes in rural or suburban areas. This loan type can be a good choice for low-income to moderate-income homebuyers. If you've always dreamed of living on a farm or in a rural location, this could be the loan to research. However, these loans aren't exclusive to rural areas; homes in suburban areas may also qualify.

Pros

• No down payment or cash reserves are required.

• Low interest rates.

• Relaxed credit requirements.

• Can pass the cost of the appraisal to the buyer.

• Option for seller to pay closing costs.

• You can pay off a loan with no penalty.

• Option to finance repairs and closing costs into the loan.

• You can use the loan to build a home on the property.

Cons

• Property must fall within specific geographical areas.

• Mortgage insurance is needed.

• Cannot exceed income limits established by the USDA.

• Cannot use a USDA loan to purchase a commercial farm.

Bottom line

USDA loans are not limited to farms or ranches. A USDA loan can be used for an existing home, modular home, new construction, and other home types. There are income and geographical restrictions that you'll need to know before applying. Approval for a USDA loan typically takes 30-60 days.

7. Balloon mortgage

Balloon mortgages allow homebuyers to have a low-interest rate on a fixed-rate loan but with a short term, usually 5, 7, or 10 years. These loans enable the homeowner to make a monthly payment of interest only or principal with interest. After the term, however, the mortgage holder must make a "balloon payment," which includes any outstanding principal. These loans allow buyers to buy a home they may not afford through more conventional loan programs.

Pros

• Low interest rate.

• Short loan terms.

• Allows the buyer to purchase more square footage than a conventional loan.

Cons

• No equity.

• It's hard to refinance.

• Higher risk of foreclosure.

Bottom line

Balloon mortgages are one of the risker mortgage options available. If you think you'll sell before the balloon payment is due and the real estate market crashes in your area or personal reasons make you unable to sell, you'll be faced with a large payment.

8. Jumbo loan

Jumbo loans finance homes that exceed the conventional loan limits set by the FHFA. They can be fixed or adjustable and are typically used for expensive home purchases.

Pros

• You may qualify for less than 20% down.

• VA jumbo loans are available.

• Allows consumers to buy a bigger home in a more desirable area.

Cons

• Higher closing costs.

• Higher interest rates.

• Proof of high income and a low debt-to-income ratio is required.

• A large amount of cash is needed in reserves.

• You need a high credit score to qualify, upwards of 700s.

• Your loan will not be guaranteed through Fannie Mae or Freddie Mac.

Bottom line

Jumbo loans are an excellent option for buying a home in a more expensive neighborhood than a conventional loan would allow. Like a balloon mortgage, they come with more significant risks than a conventional loan. The conforming loan limit for all U.S. counties is available on the FHFA website.

Find the right mortgage for you

Weighing the pros and cons of different mortgage types will help you find the right mortgage. As you do your research, ask yourself:

• How much home can I afford?

• Am I willing to move to a different area or state?

• What type of loan is best for me now and in the future?

• Who do I want to finance my loan, a big bank or a credit union?

Buying a home will likely be one of your most significant purchases. Researching the right mortgage for you will take time but could save you headaches and money in the long run. Credit unions are full-service financial institutions that can help you realize your dream of owning a home. Find a credit union today that can help you achieve your financial goals!

Did you know?

Member-owned credit unions typically offer more flexible terms and lower interest rates. Credit unions provide various mortgage options, such as fixed, adjustable, and FHA loans. Additionally, credit unions may offer specialized mortgages for first-time homebuyers or those with low credit scores. If you're in the market for a mortgage, consider exploring your options at a credit union for potentially more affordable and flexible terms.