Learn about the most common home loan types, whether you’re building a new home, buying an existing home, renovating or consolidating debt. Also, find out about specialty mortgage loans that might be right for you.
Government-backed mortgage programs can offer more options for qualification. For example, FHA loans are insured by the Federal Housing Administration and may have lower credit score requirements.
Home Mortgage Loans
Home mortgage loans are the most common way for people to finance the purchase of a residence. They have secured debt — meaning that the lender puts a lien on the property, or has ownership rights, and can take possession of the property if you don’t make your mortgage payments — and typically come with lower interest rates than unsecured debt such as credit cards.
A lender will review your finances and credit to determine whether you can afford your loan payments. You can choose to work with a traditional bank or other financial institution, or an online home lending service.
If you’re a first-time homebuyer, there are government-backed mortgage programs that assist. Or, you can opt for a nonconforming mortgage, such as a jumbo loan, which can help you buy a higher-priced home.
A jumbo loan requires more documentation and has different terms than conventional mortgages. For example, it may have a longer repayment term than 30 years and higher mortgage rates. But it may be a good option for you if you can afford the monthly payments and want to invest the money in your home over time.
Home Equity Loans
Home equity loans are a great way to convert your home equity into cash. They’re generally available for up to 80% of the home’s value minus your mortgage balance and come with fixed interest rates and terms that typically last for five to 30 years. However, you should be careful about using a home equity loan for discretionary purchases as you’re putting your house on the line. If you default, the lender can take your house and you may have trouble finding another place to live.
Both home equity loans and HELOCs are considered second mortgages and require a credit profile that meets certain standards, including good credit history, reasonable debt-to-income ratios, and an appropriate loan-to-value (LTV) percentage. The main difference is that a home equity loan is a lump sum payment that has a set interest rate and monthly payment for the entire term of the loan, whereas a HELOC offers a draw period followed by a repayment period.
Regardless of whether you choose a home equity loan or a HELOC, you’ll likely be required to pay closing costs and fees when you apply. Make sure you understand those costs and run the numbers to be sure that your new monthly payments won’t exceed the combined amounts of your existing debts. It’s also important to note that the interest you pay on a home equity loan is only tax-deductible if it’s used to buy, build, or substantially improve your home that secures the debt.
Home Renovation Loans
There are a variety of home improvement financing options including personal loans, home equity loans and HELOCs. However, home renovation loans are unique in that they allow homeowners to borrow based on their after-renovation home value and offer a single closing so that they don’t have to pay two separate debts.
Some lenders even offer home renovation loans that can be combined with your mortgage, which can help save on interest costs and fees. Whether or not this type of loan is right for you depends on the scope and cost of your renovation, the amount of equity you have in your home, and other financial goals.
For example, Fannie Mae’s HomeStyle renovation loan allows you to combine your renovation with your mortgage in a single package and offers the ability to borrow up to 96.5% of your after-renovation value, although you may need to pay PMI if you go above 80%. Another option is the FHA Title 1 property improvement mortgage, which provides loans to borrowers who may not meet the credit and equity requirements of private lenders because it’s guaranteed by the federal government. This helps increase access to funding and allows homeowners to finance both the purchase of their new home and its required repairs with a single loan. This can be particularly helpful for eligible veterans and active military members.
Jumbo Loans
If a property you want to buy is significantly above your local conforming loan limit, you’ll need to get a jumbo mortgage. This type of nonconforming mortgage is available for properties that exceed the maximum home loan amount set by the federal government’s Federal Housing Finance Agency (FHFA). For 2024, the FHFA’s maximum conforming loan limit for single-family homes was $766,550, with higher limits in high-cost areas. Jumbo mortgages require more stringent qualification requirements, such as a higher credit score and a lower debt-to-income ratio than conventional loans.
You can choose between a fixed or adjustable interest rate with a jumbo loan. Fixed-rate jumbo loans offer a low, fixed introductory rate that won’t change for a specified number of years. Adjustable-rate jumbo mortgages come with a lower, fixed introductory rate that may change periodically depending on market conditions, and usually have a cap on how much your rate can rise in a given year.
While a jumbo mortgage can provide access to luxury homes and properties in high-cost areas, it comes with a price tag and borrowing costs that can run into millions of dollars over the life of the loan. You’ll also need significant cash savings and a down payment, which can be challenging for many buyers. It’s important to evaluate your financial situation and long-term goals before committing to this type of financing.
