So many mortgage options—how do I choose?

Fixed rate? Jumbo? FHA? VA? When it comes to selecting a mortgage, you may wonder where to start. Here’s a simple explanation of some of the most common options.

Fixed-rate vs. adjustable rate

With a fixed-rate mortgage, your interest rate—and therefore your monthly payment—remains the same for the life of the loan. With an adjustable-rate mortgage (ARM), your rate remains fixed for an introductory period (typically 5, 7 or 10 years), then can adjust every year after that.

Each type of loan has its benefits and its disadvantages. With a fixed-rate mortgage, you get the security of knowing exactly how much you’ll have to pay each month. But it often starts out with a slightly higher rate than an ARM.

If you plan to stay in the home for a while, a fixed rate might be a more comfortable option for you. If you plan to refinance or sell your home before the introductory rate expires, an ARM may be a better choice. An ARM may also be a good choice if you expect your income to increase in a few years or if you plan to invest your monthly savings early on.

The terms of an ARM are typically described as "5/1" or "7/1." The first number is how many years the initial interest rate is fixed. The second is how frequently the rate can adjust after that. So, a 5/1 ARM would have an initial interest rate locked in for the first 5 years, then the rate will adjust each year over the life of the mortgage.

Conventional vs. government-insured loans

Most mortgage loans are considered “conventional loans.” They're offered by private lenders and are not backed by the government. Government-insured loans are also offered by private lenders, but they are backed by the government.

There are two types of conventional loans:

• Conforming loans – These loans have a maximum size requirement^{Disclosure 1} ($548,250 to $822,375 in 2021 depending on the region) and must meet the underwriting guidelines of Fannie Mae and Freddie Mac.^{Disclosure 2}
• Nonconforming loans – These are often called Jumbo loans because they exceed the size limits of conforming loans. They are typically not backed by Fannie Mae and Freddie Mac.

There are several types of government-insured loans. These are the most common:

• Federal Housing Administration (FHA) loans – Designed for low-to-moderate income borrowers, an FHA loan allows a lower minimum down payment (as low as 3%) and a lower credit score than most conventional loans.
• The U.S. Department of Veterans Affairs (VA) loans  – If you are a military service member (active or veteran) or the spouse of one, a VA loan is another option. Benefits include no down payment requirement—you can borrow up to 100% of the home’s cost. However, applicants must meet basic service, credit, and income requirements.
• The U.S. Department of Agriculture (USDA) Rural Housing Service loans – A USDA loan encourages low- and moderate-income borrowers to build or buy safe, affordable housing in rural areas. Eligibility is based on income and varies according to the average median income for each area.