Understanding the Different Types of Mortgages

When it comes to buying a home, one of the most important financial decisions you'll make is choosing the right mortgage. The variety of mortgage types available can feel overwhelming, especially for first-time homebuyers. Understanding your options—and how they align with your financial goals—is key to securing the best loan for your situation.

At Spotlight Realty, we believe that informed buyers make confident decisions. Whether you’re looking to buy your first home in Raleigh-Durham or you're preparing to upgrade or downsize, this guide breaks down the most common types of mortgages so you can feel empowered and ready to take the next step.

A fixed-rate mortgage is one of the most popular types of home loans. With this option, your interest rate remains the same for the entire term of the loan, typically 15, 20, or 30 years.

Best for: Buyers who want stability and plan to stay in their home long term.

Pros:

• Predictable monthly payments
• Easier long-term budgeting
• Protection against interest rate increases

Cons:

• Higher interest rates than adjustable-rate mortgages (ARMs) at the start
• Less flexibility if rates drop significantly unless you refinance

An adjustable-rate mortgage offers a lower introductory interest rate for a set period (usually 5, 7, or 10 years), after which the rate adjusts annually based on market conditions.

Best for: Buyers who plan to move or refinance before the initial fixed period ends.

Pros:

• Lower initial monthly payments
• Potential savings if rates remain low

Cons:

• Payments can increase significantly after the fixed-rate period ends
• More complex terms and risks

Backed by the Federal Housing Administration, FHA loans are designed for buyers with lower credit scores or smaller down payments. They are popular among first-time homebuyers.

Best for: Buyers with limited savings or credit history challenges.

Pros:

• Lower down payment requirements (as low as 3.5%)
• More flexible credit score criteria

Cons:

• Requires mortgage insurance (upfront and monthly)
• Lower loan limits in some areas

VA loans are backed by the U.S. Department of Veterans Affairs and are available to eligible veterans, active-duty service members, and some military spouses.

Best for: Veterans and active military members.

Pros:

• No down payment required
• No mortgage insurance
• Competitive interest rates

Cons:

• Only available to those who qualify based on military service
• Requires a VA funding fee (can be financed into the loan)

USDA loans are backed by the U.S. Department of Agriculture and are designed for buyers in eligible rural and suburban areas. These loans support low-to-moderate income households.

Best for: Buyers in rural areas with moderate incomes.

Pros:

• No down payment required
• Low interest rates

Cons:

• Must meet income eligibility limits
• Property must be located in a USDA-approved area

Jumbo loans are used to finance homes that exceed the conforming loan limits set by Fannie Mae and Freddie Mac, which are currently around $726,200 in most areas (as of 2023).

Best for: Buyers purchasing high-value properties that exceed conventional loan limits.

Pros:

• Can finance luxury or high-end homes
• Flexible terms available

Cons:

• Typically requires a higher credit score and larger down payment
• Stricter underwriting standards

With an interest-only mortgage, borrowers pay only the interest for a set period (usually 5–10 years), followed by higher payments that include principal.

Best for: High-income buyers with fluctuating cash flow or those who plan to sell or refinance before the principal payments begin.

Pros:

• Lower initial monthly payments
• Frees up cash flow in the short term

Cons:

• Higher payments later
• No equity is built during the interest-only period unless home value appreciates

A balloon mortgage offers low payments for a short term (usually 5–7 years), followed by one large payment (the “balloon”) to pay off the remaining balance.

Best for: Buyers who are confident they’ll sell or refinance before the balloon payment is due.

Pros:

• Low initial payments

Cons:

• Large lump-sum payment due at the end
• Higher risk if unable to sell or refinance in time

Choosing the right mortgage depends on your financial situation, how long you plan to stay in the home, and your risk tolerance. Here are a few questions to help guide your decision:

• How much can I afford for a down payment?
• What’s my credit score and financial history?
• How long do I plan to live in this home?
• Am I comfortable with fluctuating monthly payments?
• Do I qualify for any government-backed loan programs?

Working with an experienced real estate agent and a trusted lender is key to identifying the mortgage that best suits your goals.

At Spotlight Realty, we’re more than just local experts—we’re your partners in every step of the real estate process. From understanding your financing options to negotiating offers and closing with confidence, we’re here to make sure you feel supported and informed.

Whether you’re buying or selling, check out our free guides to help you get started:

• Spotlight Realty Buyer’s Guide
• Spotlight Realty Seller’s Guide

Ready to explore homes in Raleigh-Durham or want personalized advice on your mortgage options? Connect with one of our agents today. Let us help you shine in your real estate journey.