Mortgages fall into several distinct categories based on who backs the loan, how the interest rate works, and how much you’re borrowing. Understanding the differences helps you narrow your options before you ever talk to a lender. Here’s a breakdown of each type, what it costs, and who it’s best suited for.
Conventional Loans
A conventional loan is any mortgage that isn’t backed by a government agency. These are the most common type of home loan, and they’re offered by banks, credit unions, and online lenders. Conventional loans come in two flavors: conforming (meaning they fall within the loan limits set by the Federal Housing Finance Agency) and nonconforming (meaning they exceed those limits).
You can put as little as 3% down on a conventional loan, but if your down payment is less than 20%, you’ll pay private mortgage insurance, often called PMI. PMI typically adds 0.2% to 2% of the loan balance per year to your costs. The upside is that PMI drops off automatically once you reach 20% equity in the home, unlike some government-backed loans where mortgage insurance sticks around for the life of the loan. Most lenders look for a credit score of at least 620 for conventional financing, though better scores unlock lower interest rates.
FHA Loans
FHA loans are insured by the Federal Housing Administration and designed for borrowers who may not qualify for conventional financing. The minimum credit score is 580 with a 3.5% down payment. If your score falls between 500 and 579, you can still qualify, but you’ll need to put 10% down.
The trade-off is mortgage insurance. FHA loans require both an upfront mortgage insurance premium (typically 1.75% of the loan amount, which can be rolled into the loan) and an annual premium that’s split into monthly payments. If you put less than 10% down, that annual premium stays for the entire life of the loan. You’d need to refinance into a conventional loan later to eliminate it. FHA loans are popular with first-time buyers and anyone rebuilding credit, but the long-term insurance costs can make them more expensive than a conventional loan over time.
VA Loans
VA loans are guaranteed by the Department of Veterans Affairs and available to active-duty service members, veterans, and eligible surviving spouses. The biggest advantage is that VA loans require no down payment and no monthly mortgage insurance. There is a one-time funding fee, which varies based on your service history, down payment, and whether you’ve used a VA loan before, but some borrowers are exempt from it entirely.
VA loans also tend to offer competitive interest rates because the government guarantee reduces lender risk. There’s no official minimum credit score set by the VA, though most lenders impose their own floor, usually around 620. If you’re eligible, a VA loan is often the least expensive way to finance a home.
USDA Loans
USDA loans are backed by the U.S. Department of Agriculture and target buyers in rural and suburban areas. To qualify, the home must be in an eligible rural area as defined by USDA, and your household income must fall within certain limits for your county. Like VA loans, USDA loans offer zero-down financing.
USDA loans carry a guarantee fee (similar to FHA’s mortgage insurance) that includes both an upfront charge and an annual fee, though the rates are lower than FHA premiums. The income cap means these loans aren’t available to higher earners, but for moderate-income buyers in qualifying areas, they’re one of the most affordable options available. You can check your address and income eligibility on the USDA’s website before applying.
Jumbo Loans
Any mortgage that exceeds the conforming loan limit is considered a jumbo loan. For 2026, the national baseline conforming limit is $832,750 for a one-unit property. In higher-cost areas, that ceiling rises to $1,249,125. If you need to borrow more than these amounts, you’ll need jumbo financing.
Because jumbo loans are too large for Fannie Mae or Freddie Mac to purchase, lenders take on more risk and set stricter requirements. Expect to need a credit score of 700 or higher, a down payment of 10% to 20%, and substantial cash reserves (often six to twelve months of mortgage payments sitting in your accounts). Interest rates on jumbo loans were historically higher than conforming rates, though the gap has narrowed in recent years and sometimes disappears entirely depending on the lender and your financial profile.
Fixed-Rate Mortgages
With a fixed-rate mortgage, your interest rate and monthly principal-and-interest payment stay the same for the entire loan term. The most common terms are 30 years and 15 years, though some lenders offer 10-year or 20-year options.
A 30-year fixed gives you the lowest monthly payment but costs more in total interest. A 15-year fixed carries higher monthly payments but saves you a significant amount of interest over the life of the loan, often hundreds of thousands of dollars on a typical home. Fixed-rate loans are the default choice for most buyers because the payment predictability makes budgeting straightforward. Any of the loan types above (conventional, FHA, VA, USDA, jumbo) can come with a fixed rate.
Adjustable-Rate Mortgages
An adjustable-rate mortgage, or ARM, starts with a fixed interest rate for an introductory period, then adjusts periodically based on a market index. A 5/1 ARM, for example, holds its initial rate for five years, then adjusts once per year. A 7/6 ARM stays fixed for seven years, then adjusts every six months.
The initial rate on an ARM is typically lower than what you’d get on a comparable fixed-rate loan, which can mean noticeably lower payments in the early years. The risk is that once the adjustable period kicks in, your rate (and payment) can rise. ARMs come with caps that limit how much the rate can increase at each adjustment and over the life of the loan, so there’s a ceiling on the worst-case scenario. ARMs tend to work well for buyers who plan to sell or refinance before the fixed period ends. If you expect to stay in the home for 20 or 30 years, a fixed rate usually makes more sense.
Interest-Only Mortgages
An interest-only mortgage lets you pay just the interest on the loan for a set period, usually five to ten years. During that window, your monthly payment is lower because you’re not paying down any principal. Once the interest-only period ends, the loan converts to a fully amortizing payment (meaning you start repaying principal and interest), and your monthly bill jumps, sometimes significantly.
These loans appeal to borrowers with irregular income, like commission-based salespeople or self-employed professionals, who want lower payments now and expect higher earnings later. They’re also used by some real estate investors. The downside is that you build no equity through your payments during the interest-only years, and the higher payments afterward can be a shock if your financial situation hasn’t improved as expected.
Balloon Mortgages
A balloon mortgage has a shorter term, typically five to ten years, with monthly payments that don’t fully pay off the loan. At the end of the term, the remaining balance comes due as a single large payment called the balloon. That final payment is generally more than two times the loan’s average monthly payment and often represents a significant portion of the original loan amount.
Borrowers who take balloon mortgages usually plan to refinance or sell the property before the balloon comes due. The monthly payments during the loan term are lower than a standard 30-year mortgage, which can be attractive in the short term. But if you can’t refinance or sell when the balloon hits, you could face a serious cash crunch. Balloon mortgages are far less common in the residential market than they once were, and most buyers are better served by a conventional fixed-rate or adjustable-rate loan.
Choosing the Right Type
Your best mortgage type depends on a handful of practical factors: your credit score, how much you can put down, whether you qualify for a government program, and how long you plan to stay in the home. If you’re a veteran, check VA loan eligibility first since it’s hard to beat zero down with no mortgage insurance. If you’re buying in a rural area with moderate income, USDA loans offer similar advantages. FHA loans work well when your credit needs some room, and conventional loans give you the most flexibility once you have solid credit and some savings.
For the rate structure, lock in a fixed rate if you want certainty and plan to stay put. Consider an ARM if you’re confident you’ll move or refinance within the introductory period and want lower payments in the meantime. Interest-only and balloon loans are specialized tools that carry real risk if your plans change, so they’re worth considering only when they align tightly with a specific financial strategy.