Mortgage loan types, explained without a sales pitch

How the CFPB organizes loans

The CFPB explains that mortgage loans are organized into categories based on the size of the loan and whether they are part of a government program. It also notes that each loan type is designed for different situations, sometimes only one fits, and if several fit, you should try scenarios and ask lenders for several quotes.

Three choices shape every loan:

1. Loan type: conventional or a government program such as FHA, VA or USDA.
2. Interest rate type: fixed or adjustable.
3. Loan term: commonly 30 or 15 years, sometimes other lengths.

Conventional loans

Conventional loans are not part of a government program. According to the CFPB's mortgage insurance guidance, if you put down less than 20 percent on a conventional loan, the lender typically requires private mortgage insurance. The CFPB says PMI rates vary by down payment and credit score, are generally cheaper than FHA rates for borrowers with good credit, are mostly paid monthly with little or nothing at closing, and can be cancelled under certain circumstances. See mortgage insurance.

FHA loans

FHA loans are insured by the Federal Housing Administration. The CFPB explains that mortgage insurance is required on all FHA loans, costs the same regardless of credit score with only a slight increase for down payments under five percent, and includes both an upfront premium and an annual premium paid monthly. If you cannot pay the upfront fee in cash, you can roll it into the loan, which increases the loan amount and overall cost.

VA loans

For servicemembers, veterans and their families, the CFPB explains that the VA guarantee replaces mortgage insurance and works similarly. There is no monthly mortgage insurance premium, but you pay an upfront funding fee, which can also be rolled into the loan, increasing the loan and overall costs. The Department of Veterans Affairs sets eligibility and fee rules.

USDA loans

The CFPB describes the U.S. Department of Agriculture program as similar to FHA but typically cheaper, with insurance paid both at closing and monthly, and an option to roll the upfront portion into the loan. Eligibility depends on property location and household income rules set by the program; check the USDA's own eligibility pages.

Fixed or adjustable rate

The CFPB notes that most borrowers choose fixed-rate mortgages. With a fixed rate, your interest rate and principal and interest payment stay the same, though your total payment can still change if taxes, insurance or mortgage insurance change.

Most adjustable-rate mortgages, the CFPB explains, have two periods: an introductory period when the rate is fixed, then a period when the rate goes up and down based on the market. The CFPB warns your principal and interest payment could go up a lot, even double. Some ARMs have caps limiting adjustments. An ARM may suit someone who plans to move within the fixed period, but if you stay longer than expected, you could pay a lot more.

Questions to ask about any ARM:

• How long is the fixed period?
• What index and margin set the new rate?
• What are the caps on each adjustment and over the life of the loan?
• What is the highest payment possible, and when could it happen?

15 years or 30 years

The CFPB says shorter loan terms generally save money overall but have higher monthly payments, because you borrow for less time and the rate is usually lower. How much you save depends on the specific terms and rate. Ask for estimates on both terms if you are unsure, and check the higher payment against your budget, not just the lender's maximum.

Features to question in any loan

The CFPB recommends being careful with loan features that could surprise you, such as prepayment penalties, interest-only periods, negative amortization and balloon payments. If any appear, ask why, and ask for another Loan Estimate without the feature so you can see the difference in cost.

It also explains that lenders generally must verify income, employment, assets, debts and credit history to determine your ability to repay. Loans meeting certain criteria are called qualified mortgages; "nonqualified mortgages" can be riskier or more expensive.

Down payment help

Many state and local housing agencies offer programs for first-time buyers, often used alongside these loan types. Find them through official sources; see first-time buyer help.

Putting it together

A comparison that matches the CFPB's advice:

1. List the loan types you qualify for.
2. For each, request a Loan Estimate with the same price, down payment and term.
3. Compare monthly payment, mortgage insurance or guarantee fee, cash to close and total costs over a realistic time frame.
4. Check the payment against your own budget using the payment worksheet.

See compare Loan Estimates side by side for the line-by-line method.

Program rules, fees and eligibility change. Check the CFPB, HUD, VA and USDA sites for current details.