How Do Different Types of Mortgage Loans Work? Understanding Their Benefits

A home is a significant investment, probably the most significant one most people will ever make. As such, acquiring the funds for purchasing it often requires assistance in the form of a mortgage loan. In the world of home buying, the types of mortgage loans available can be overwhelming. Thus, it’s vital to understand the various types of mortgage loans, how they work, and their benefits.

Fixed-Rate Mortgage Loan

The fixed-rate mortgage loan is arguably the most traditional type of mortgage loan. What makes this loan stand out is the constant interest rate over the lifespan of the loan, typically 15, 20, or 30 years. The primary benefit of a fixed-rate mortgage is the predictable payment schedule. Irrespective of the market trends, your monthly mortgage payment remains the same – giving you financial stability and ease in budgeting.

Adjustable-Rate Mortgage (ARM)

Contrary to the fixed-rate mortgage, an adjustable-rate mortgage (ARM) has fluctuating interest rates. Following a fixed-rate period ranging from one to ten years, the rates adjust yearly based on the market index. This type of loan can be beneficial when initial fixed rates are lower than usual fixed-rate loans, enabling borrowers to pay less during the fixed-rate period. However, as the interest rates are adjustable, borrowers face uncertainty when the fixed-rate period ends.

FHA Loans

Insured by the Federal Housing Administration, FHA loans allow borrowers with lower credit scores and smaller down payments to get a mortgage. This type of mortgage loan requires only a 3.5% down payment for credit scores of 580 and above, and a 10% down payment for credit scores between 500-579. Since the FHA insures these loans, lenders are more willing to take on the potential risk.

VA Loans

Veterans Affairs (VA) loans offer significant benefits to military veterans, active-duty service members, and certain military spouses. VA loans are backed by the U.S. Department of Veterans Affairs and provide beneficiaries with 100% financing, meaning no down payment is required. Another benefit is that these loans don’t demand private mortgage insurance (PMI), even with no down payment.

USDA Loans

USDA loans, or Rural Development loans, are insured by the U.S. Department of Agriculture. As the name implies, they are designed for homes in rural areas, and they offer 100% financing and lower mortgage insurance premiums. USDA loans are an excellent option for eligible borrowers who are comfortable living in rural areas.

Interest-Only Mortgage

Interest-only mortgages allow borrowers to pay only the interest on the loan for a specific period, typically between 5 and 10 years. During this phase, the monthly payments are substantially lower. This type of mortgage loan could be suitable for those expecting to afford larger payments in the future or intending to sell the home before the interest-only period ends.

Jumbo Mortgage

A jumbo mortgage is a type of mortgage loan that exceeds the limit set by the Federal Housing Finance Agency (FHFA). In 2021, the maximum conforming loan limit for single-family homes is $548,250 in most parts of the U.S. Jumbo loans cater to borrowers purchasing luxury or expensive properties.

Bajaj Finserv App

Securing a mortgage loan is now hassle-free with the Bajaj Finserv app. Its easy-to-use interface facilitates swifter funds, eligibility checks, and transparent repayment options. Users benefit from instant updates and guidance, empowering them to maximize property assets efficiently and make informed financial decisions.


The ideal mortgage loan depends on an individual’s financial circumstances and long-term goals. Hence, homebuyers need to understand the features, benefits, and potential drawbacks of all different types of mortgage loans before making a decision. Consulting with a reputable lender or mortgage broker can provide valuable insight and make the mortgage loan process less overwhelming. With careful analysis and the right guidance, you can secure a loan that fits your needs and helps cement your home ownership journey.

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