Pros and Cons of Different Loan Types

Pros Cons
Who it’s best for

Fixed-rate mortgages Pros Rates and payments remain constant, despite interest rate changes. Stability makes it easier to budget. Simple to understand.

Cons Interest payments tend to be higher. To get a lower rate, borrowers have to refinance the loan — and pay closing costs again.

Who it’s best for Borrowers who plan to stay in a home many years and want predictable, stable payments at the same interest rate for the life of the loan.

Adjustable-rate mortgages Pros Feature lower rates and payments early in the loan term. May qualify for more house because payments are lower (initially). Help you save and invest more money with a lower payment early in the loan. Cons Rates and payments can rise over the life of the loan. Higher rates — and payments — when loan resets can be hard to manage. ARMs are difficult to understand. Lenders have much more flexibility to customize. Who it’s best for Borrowers who don’t plan to stay in a home for more than a few years — especially when rates are higher.
Conventional mortgages Pros Can be used for a primary home, second home or investment property. Overall borrowing costs tend to be lower than other loan types. PMI is cancellable once you’ve gained 20 percent equity. Put as little as 3 percent down for agency loans. Cons Minimum FICO score of 620. Debt-to-income ratio of 45 to 50 percent. PMI typically required if your down payment is less than 20 percent. Significant documentation required to verify income, assets, down payment and employment. Who it’s best for Borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.
Government-insured mortgages Pros More relaxed credit requirements. Don’t require a large down payment. Open to repeat and first-time buyers. Cons Mandatory mortgage insurance premiums that cannot be canceled on some loans. Higher overall borrowing costs. May require more documentation to prove eligibility. Who it’s best for Borrowers who have low cash savings, less-than-stellar credit or can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for military borrowers.
Jumbo mortgages Pros Borrow more money to buy a home in an expensive area. Interest rates tend to be competitive with other conventional loans.

Cons Down payment of at least 10 to 20 percent is needed. Minimum FICO score of 660, but average is typically 700 or higher. Maximum DTI ratio of 45 percent. Must have significant assets (10 percent of the loan amount) in cash or savings accounts.

Who it’s best for Affluent borrowers purchasing a high-end home who also have good to excellent credit, high incomes and a substantial down payment.