Types of mortgages and how they compare

What is a mortgage?

A mortgage is a loan used to buy or refinance a home. The lender provides the funds, and the borrower agrees to repay the amount plus interest over a set period. The home itself typically serves as collateral, meaning the lender may have the right to take the property if the borrower stops making payments.

Most mortgages are repaid over 15 or 30 years. Monthly payments generally include principal, interest and often property taxes and homeowners insurance collected through an escrow account.

Mortgage types at a glance

One thing that can make mortgages confusing is that the same loan may be described in more than one way. For example, a mortgage can be conventional, fixed-rate and conforming all at the same time. Each label describes a different characteristic. The table below lists the major types and what sets each apart.

A lender may offer different combinations of these features. Eligibility, rates, fees and property requirements can also vary by lender and loan program.

Mortgage types based on the loan program and size

The loan program describes who backs or insures the mortgage. This affects who can qualify, what down payment may be required and what rules apply.

Conventional mortgages

A conventional mortgage is not insured or guaranteed by a federal government agency. Many conventional mortgages follow guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that buy mortgages from lenders to help support broader access to mortgage financing.

Qualifying usually requires a minimum credit score and down payment. If a borrower puts down less than 20% of the purchase price, the lender may require private mortgage insurance (PMI). PMI protects the lender, not the borrower, and is typically removed once the borrower builds enough equity.

Conventional loans can be conforming or non-conforming. A conforming loan stays within the limits set annually by the Federal Housing Finance Agency (FHFA). A non-conforming loan, such as a jumbo mortgage, exceeds those limits.

FHA loans

An FHA loan is issued by an approved lender and insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. FHA loans may be available to borrowers who have a smaller down payment or credit history that does not meet some conventional loan requirements.

FHA loans require mortgage insurance premiums paid both upfront and annually. These add to the overall cost of borrowing and are worth factoring into any comparison. The home must also meet FHA property and appraisal requirements.

VA loans

VA-backed purchase loans are available to eligible veterans, active-duty service members and certain surviving spouses. A private lender provides the mortgage while the U.S. Department of Veterans Affairs guarantees part of the loan.

VA loans typically do not require a down payment or private mortgage insurance, though a one-time funding fee and other closing costs may apply depending on the borrower's eligibility and loan details. Borrowers typically need a Certificate of Eligibility to show that they qualify for the benefit.

USDA loans

The U.S. Department of Agriculture supports mortgage programs for eligible borrowers purchasing homes in qualifying rural areas. Income, location and property requirements apply.

Some qualified borrowers may be eligible for financing without a down payment through the USDA Single Family Housing Guaranteed Loan Program. Availability and qualification are determined through participating lenders and USDA program requirements, and some fees may apply.

Jumbo mortgages

A jumbo mortgage is a loan that exceeds the FHFA conforming loan limit for the property’s location. Because these loans cannot be purchased by Fannie Mae or Freddie Mac, lenders take on more risk. Requirements typically include a stronger credit profile, a larger down payment and more extensive financial documentation. Specific requirements vary by lender.

Conforming limits are updated and may be higher in designated high-cost areas. Borrowers considering a higher-priced home can ask lenders whether the needed loan would be conforming or jumbo.

Fixed-rate and adjustable-rate mortgages

The interest-rate structure describes how the interest rate behaves over time and affects how predictable the monthly mortgage payment may be. This applies across loan programs. A VA loan, for example, can be either fixed-rate or adjustable-rate.

Fixed-rate mortgages

A fixed-rate mortgage has an interest rate that does not change for the life of the loan. The combined principal and interest portion of the monthly payment stays the same from the first payment to the last, which can make long-term budgeting more predictable. If a borrower chooses to use an escrow account, the total monthly payment can change when property taxes, homeowners insurance or mortgage insurance costs change.

Fixed-rate loans are commonly offered in 15-year and 30-year terms, though other options may be available. A shorter term typically means higher monthly payments but less total interest paid over time.

A fixed rate may appeal to borrowers who expect to keep the loan for several years and prefer a more predictable principal and interest payment.

Adjustable-rate mortgages

An adjustable-rate mortgage (ARM) starts with a fixed interest rate for an initial period and then adjusts periodically at scheduled times. For example, a 5/1 ARM has a fixed rate for the first five years and then adjusts once a year after that.

ARMs can offer a lower initial rate than fixed-rate loans, but payments can increase after the fixed period ends. Before choosing an ARM, consider whether your budget could handle a higher payment if the rate increases.

Other mortgage options

Several mortgage types serve specific purposes or apply to particular situations:

• Construction loan: Provides short-term financing to build a new home. Funds are typically released in stages as construction progresses, and the loan often converts to a standard mortgage when the home is complete.
• Renovation mortgage: Combines the cost of buying and renovating a home into a single loan. FHA 203(k) loans and Fannie Mae HomeStyle loans are common examples and may be worth exploring for buyers considering a fixer-upper.
• Assumable mortgage: Allows a buyer to take over a seller's existing loan, including its original rate and remaining balance. Not all mortgages are assumable, and the lender or loan servicer generally needs to approve the new borrower. The buyer may also need funds or separate financing to cover the difference between the home’s price and the balance remaining on the assumed mortgage.
• Interest-only mortgage: Allows borrowers to pay only interest for a set period before payments increase to include principal. It may suit borrowers with changing income or short-term plans, but it can be harder to manage and may cost more over time.
• Balloon mortgage: Has lower monthly payments for a fixed term, followed by a single large payment at the end. The borrower may need to make the final payment, sell the property or qualify for refinancing. Because refinancing is not certain, it is helpful to understand the size and due date of the balloon payment before accepting the loan.
• Reverse mortgage: Available to eligible homeowners who are typically 62 or older, a reverse mortgage allows borrowing against home equity without monthly payments. The balance grows over time and is typically repaid when the homeowner sells the home, moves out or passes away. These are complex products and are worth reviewing carefully with a financial professional.

What is a crypto-backed mortgage?

A crypto-backed mortgage is a home loan that uses cryptocurrency as part of the financing structure. Before exploring it, it helps to understand how cryptocurrency can be involved in a home purchase, because not every scenario works the same way.

• Crypto as collateral: The borrower pledges cryptocurrency as collateral to secure the mortgage or a related loan. The crypto is not sold. It is typically held by the lender or a third-party custodian during the loan term. This is the scenario most accurately described as a crypto-backed mortgage.
• Crypto as a financial reserve: Some lenders may consider cryptocurrency holdings as part of a borrower's documented assets when evaluating an application. The crypto is not used as collateral but may help demonstrate financial strength.
• Crypto converted to cash: A borrower sells cryptocurrency and uses the cash proceeds for a down payment or closing costs. This is a conventional transaction and is not a crypto-backed mortgage.

Crypto-backed mortgage programs are relatively new and may not be widely available.

Things to consider with a crypto-backed mortgage

Crypto-backed mortgages involve risks and structures that differ significantly from traditional home loans.

• Volatility: Cryptocurrency values can change quickly and significantly. A large drop in value may trigger a collateral call, requiring the borrower to add funds or face liquidation of pledged assets.
• Custody: Pledged cryptocurrency is typically held by the lender or a third-party custodian. The borrower may not be able to transfer or sell it while the loan is active.
• Liquidation risk: If the collateral value falls below a required threshold, the lender may sell the cryptocurrency to cover the loan balance.
• Fees and rates: Crypto-backed loans may carry higher rates and fees than a comparable conventional mortgage. The total cost of borrowing may be higher.
• Lender availability: These products are offered by a small number of lenders and are not broadly available through traditional banks or credit unions.
• Accepted cryptocurrencies: Not all cryptocurrencies qualify as collateral. Bitcoin and Ethereum are most commonly referenced, though lender policies vary.
• Regulatory environment: Rules governing crypto as a mortgage asset are still developing. Requirements could change, which may affect the availability and terms of these products.
• Tax considerations: Pledging cryptocurrency as collateral and selling it for a down payment are treated differently for tax purposes. A tax professional can help you understand what may apply to your situation.

How to compare different types of mortgages

The loan with the lowest advertised rate may not have the lowest overall cost. Compare the complete terms of each offer, including:

• Annual percentage rate (APR): The APR reflects the interest rate plus fees and gives a more complete picture of cost than the rate alone.
• Loan term: A shorter term typically means higher monthly payments but less total interest paid. A longer term lowers monthly payments but increases the total paid over time.
• Rate structure: Determine whether the rate is fixed or can change over time.
• Down payment: Some programs allow low or no down payment. A smaller down payment may mean higher monthly costs or added insurance requirements.
• Closing costs: Review lender fees, points, appraisal expenses and other charges.
• Mortgage insurance: Find out whether it is required, how much it costs and when it may end.
• Qualification requirements: Credit, income, debt, assets, property use and location may affect eligibility. Government-backed loans have specific requirements worth confirming early.
• Payment changes: Ask when and why the total monthly payment could increase.
• Prepayment terms: Confirm whether the loan includes any charge for early repayment.
• Special risks: Review balloon payments, interest-only periods, adjustable rates or collateral requirements.

Lenders generally provide a Loan Estimate after a consumer applies for a mortgage. Comparing Loan Estimates from multiple lenders can help a borrower review rates, monthly payments and closing costs using a consistent format.

Questions to ask a mortgage lender

When you are ready to speak with a lender, these questions can help you understand and compare your options:

• What loan programs do I qualify for based on my situation?
• What is the APR for each option, and what fees does that figure include?
• What down payment is required for each program I am eligible for?
• Will I need mortgage insurance, how much will it cost and when does it end?
• What are the estimated total closing costs?
• How long is the rate lock, and is there a fee to extend it?
• How long will it take to close, and what can I do to avoid delays?

Practical next steps

Understanding mortgage types is a useful starting point, but the right loan depends on your financial situation, how long you plan to stay in the home and what programs you qualify for. When you are ready to move forward, speaking with a licensed mortgage lender is the next step. Before you close on a home, it may also be worth thinking about homeowners insurance. A State Farm agent can help you understand what coverage options may be available for your new home.