6 Types of home loans every buyer should know
Published March 24, 2025 by Angela Talbot
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Categories:
- Home Lending
Buying a home is one of the most significant financial decisions you’ll make in your lifetime. But navigating the mortgage world can feel overwhelming, especially with so many home loan options available. Choosing the right home loan isn’t just about affordability—it’s about aligning with your long-term goals and financial well-being.
This article will give you a clear understanding of the six most common types of home loans, their key features, benefits, and considerations. By the end, you’ll know exactly what to look for in the perfect loan to make your home-buying journey as smooth as possible.
Understanding fixed-rate mortgages
A fixed-rate mortgage is a classic choice for homebuyers who appreciate stability and predictability. This loan type locks in a consistent interest rate for the entire term, making your monthly payments the same.*
Key features
- The term length typically spans 15 to 30 years.
- Monthly payments remain consistent, regardless of market fluctuations.
Who should consider it?
A fixed-rate mortgage is ideal for individuals planning to stay in their home long-term and who want predictable monthly payments to help with budgeting. While rates on fixed-rate loans are usually slightly higher than other options, their stability makes them particularly attractive to cautious buyers.
Pro tip: Locking in a fixed rate during periods of low interest can save you thousands over the life of the loan.
Exploring adjustable-rate mortgages
An adjustable-rate mortgage (ARM) offers a lower introductory interest rate for a set period—often the first 5, 7, or 10 years—before rates can adjust periodically based on market conditions.
Key features
- Lower starting rates compared to fixed-rate loans.
- Rates can increase or decrease after the initial fixed period ends.
- Includes hybrid options like 5/1 ARMs, where the rate adjusts annually after five years.
Who should consider it?
ARMs are great for homebuyers who plan to sell or refinance before the adjustable period begins. However, this type of loan isn’t ideal for those who prefer predictability, as rate increases can lead to higher monthly payments.
Remember: While ARMs offer initial savings, it’s crucial to budget for potential rate hikes or prepare to refinance.
The benefits of loans for first-time buyers
First-time homebuyer loans are specifically designed to make homeownership accessible to those new to the housing market. These loans often include flexible terms, lower down payments, and financial assistance programs.
Key features
- Down payments as low as 3% in many cases.
- No application fee at Webster First.
Who should consider it?
Anyone new to homeownership who needs assistance with upfront costs or credit requirements. These options are designed to ease financial stress and make entering the housing market more accessible.
Taking advantage of home equity loans and lines of credit
A home equity loan allows homeowners to borrow against the equity they’ve built over time. Popularly referred to as a “second mortgage,” this option provides a lump sum payment.
Key features
- Fixed interest rate, typically lower than personal loans or credit cards.
- Flexible use, from home renovations to debt consolidation.
Who should consider it?
Homeowners looking to fund large expenses like renovations or consolidate higher-interest debt. It’s essential, though, to ensure you’re comfortable with the additional monthly payments.
Home Equity Lines of Credit (HELOC)
A Home Equity Line of Credit (HELOC) also allows you to borrow against the equity in your home, providing a revolving line of credit to use as needed. It’s a flexible option for managing unexpected expenses or financing long-term projects.
Key Features
- Variable Interest Rates: Often lower than credit cards or unsecured loans, but they can fluctuate over time.
- Revolving Credit: Borrow only what you need, up to your limit, and repay it to reuse the credit.
- Draw and Repayment Periods: Typically, there is a defined “draw period” where you can borrow, followed by a repayment period.
- Flexible Use: Funds can be used for anything from education expenses to emergency repairs.
Who Should Consider It?
HELOCs are ideal for homeowners with significant equity who need flexible access to funds over time. They’re well-suited for individuals planning ongoing or unpredictable expenses, such as home improvement projects or covering tuition costs. However, it’s vital to be disciplined with your withdrawals and mindful of rising interest rates, as this could affect your monthly repayment amounts.
Important: Be cautious—using your home as collateral means missed payments could lead to foreclosure.
Understanding construction loans for building a dream home
If you’re planning to custom-build a home, a construction loan offers short-term financing for your project. These loans cover costs for land, labor, and materials.
Key features
- Typically requires a higher down payment.
- Funds are disbursed in stages as construction progresses.
- Once completed, it often converts into a permanent mortgage.
Who should consider it?
Buyers looking to build rather than buy an existing property. These individuals typically need a detailed plan and budget to ensure approval.
Disclaimer: Construction loans often come with higher interest rates due to the level of risk involved.
Comparing the 6 common home loan types
Here’s a quick snapshot of how the six loan types stack up against each other based on key factors.
|
Loan Type |
Best For |
Interest Rate |
Down Payment |
Term Length |
|---|---|---|---|---|
|
Fixed-Rate Mortgage |
Long-term stability |
Fixed for the loan’s life |
Typically 5-20% |
15-30 years |
|
Adjustable-Rate Mortgage |
Short-term savings |
Lower initial rate, adjusts annually |
Typically 5-10% |
5-30 years |
|
First-Time Homebuyer Loans |
New buyers needing flexibility |
Varies (often fixed) |
Often as low as 3% |
10-30 years |
|
Home Equity Loan |
Homeowners leveraging equity |
Fixed rate; generally lower |
None |
5-15 years |
|
Construction Loan |
Custom home builders |
Higher rates, short-term |
Usually 20%+ |
Typically 1 year |
|
Home Equity Line of Credit (HELOC) |
Flexible borrowing from home equity |
Variable rate, adjusts with prime rate |
None |
10-20 years |
5 tips for first-time home buyers
If you’re buying a home for the first time, here’s how to select the best loan for your needs.
1. Understand your financial standing
Review your credit score, income, and existing debts to determine what you can afford. Tools like online mortgage calculators can help.
2. Research loan options
Compare the pros and cons of various loan types and ask lenders questions to better understand your eligibility.
3. Shop around for rates
Interest rates can vary widely. Don’t be afraid to gather quotes from multiple lenders to secure the lowest possible rate.
4. Consult a trusted financial advisor
A professional can guide you on tax benefits, long-term costs, and overall affordability.
5. Factor in additional costs
Beyond your loan, account for property taxes, insurance, and closing costs to ensure your monthly budget stays on track.
Make your home-buying process easier
Choosing the right home loan is one of the most important steps toward homeownership. By understanding the benefits and potential drawbacks of each loan type, you’ll be better prepared to make an informed decision that aligns with your financial goals and lifestyle.
Whether you’re a first-time buyer or a seasoned homeowner, finding the perfect loan doesn’t have to be overwhelming. Begin your home-buying process today by exploring tailored loan options.
Apply for a mortgage now to get started with personalized guidance.
*Monthly payment refers to principal and interest here. If taxes and insurances are included in your payments, total monthly payment amounts can change due to town taxes or insurance premiums increasing.