A mortgage loan can be used to buy any property or asset. As there are varied options available for this type of loan, people may get confused about choosing the right one. In addition, they may get confused regarding their features, merits and demerits, and other factors while making their choice.

This article provides details about the varied options available with mortgage loans:

Conforming loan
This loan refers to the amount offered to the borrowers according to the guidelines set by Freddie Mac and Fannie Mac. These two government-operated corporations are responsible for selling and purchasing MBS (Mortgage-Backed Securities).

So, while approving a conforming loan, lenders and finance companies have to follow the criteria set by these corporations.

Jumbo loan
This type of mortgage loan is not bought by Fannie Mae or Freddie Mac as the loan amount is higher than the limit set by these government-operated agencies. As the loan amount with this type is typically high, it becomes riskier for finance companies and lenders to approve it.

So, to get this loan, the borrower must have an outstanding credit score and a steady source of income to make the down payment. In contrast to other loans, the interest rates are also quite high.

Adjustable-rate loan
Adjustable-rate mortgage (ARM) derives its name from one of its features, flexible interest rate. Here, the interest rate varies throughout the term of the loan. Usually, there is a short, fixed period during which the interest rate remains fixed after which the rates are adjusted from time to time.

Fixed-rate loan
This type of mortgage loan comes with a fixed tenure and static rate of interest. So, the amount that has to be repaid does not change during the tenure of the loan.

Additionally, the interest rate and tenure of the loan are directly proportionate to each other. It is beneficial for both the borrower and lender as the loan will get repaid within the fixed tenure.

Conventional loans
A conventional loan refers to a mortgage loan which is not backed or insured by the Federal Government. So, choosing this type of mortgage loan can be risky.

Government-insured loans
There are three government-insured loans — USDA loan, VA loan, and FHA loans.

• USDA loan
  It is also known as RHS (Rural Housing Service) loan. It is offered by the United States Department of Agriculture. It extends loans to people living in rural areas who have a low yet steady source of income.
• VA loan
  This mortgage loan has been designed by the U.S. Department of Veteran Affairs. It is for people who come from a military background. It is guaranteed by the federal government, and so, the Department of Veteran Affairs will reimburse the lender in case of any loss.
• FHA loan
  The Federal Housing Administration insures this type of mortgage. It is best suited for people who wish to make a small downpayment as borrowers can qualify for this loan with a downpayment of as low as 3.5% of the property’s value.