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Types of Mortgage Loans – Lexington Law

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You’ve worked hard and now you’re ready to buy a new home. Find out about the types of mortgage loans to understand your options and make an educated decision.

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

As of mid-2019, around 37% of homeowners in the U.S. owned their property free and clear, which means any mortgage they had was paid off. That leaves 63% of homeowners still making that payment every month. What you might not realize is that there are many types of mortgage loans, and those millions of homeowners have different rates and terms. Understanding all your options is one of the first steps in choosing the type of mortgage that’s right for you and your situation.

What Is a Mortgage?

A mortgage is a loan that you get to buy property, such as land or a home. Like any other loan, mortgages have components such as principle and interest. But since they’re for such large amounts, they can be more complex than other loans. Some common components involved in mortgages include:

  • Principal. This is the part of the loan that is what you borrowed—or what’s left of that amount as you pay it down.
  • Interest. Interest is what you pay to be able to borrow the principal amount. It’s usually charged as a percentage of what you owe.
  • Terms. This typically refers to the structure of your loan, such as how many years it’s for.
  • Insurance. You may need to pay homeowners’ insurance as part of your mortgage payment. This is property insurance that helps cover losses if your home is damaged or lost in a fire or other covered disaster. Depending on how much you put down on your mortgage or what type of mortgage loan you have, you may also have to pay private mortgage insurance. PMI is coverage for the lender—if you fail to pay the mortgage, it helps them recoup some of their losses.
  • Taxes. Depending on where you live, you might need to pay property taxes on your home. This can be rolled into the mortgage and your monthly payments.

The Main Types of Mortgages

Many types of mortgages exist. Find out about some of the most common below.

Government-Backed Mortgages

What is it? Government-backed mortgages are at least partially ensured by the federal government. The loans don’t come from the federal government, however. They still come from commercial lenders.

Pros: Because the loan is government-backed, it’s seen as less risky than a conventional mortgage for the lender. That means that you might be able to get approved for one of these loans with a lower credit score or smaller down payment.

Cons: Some government-backed loans mandate PMI, which can make them potentially more expensive in situations where someone has good credit and a large down payment.

Types of Government-Backed Mortgages

  • FHA Loans. Loans insured by the Federal Housing Administration can be approved with a credit score as low as 500 under certain conditions. If you have a higher credit score, you might be able to qualify for an FHA loan with only 3.5 percent down.
  • USDA Loans. These loan options typically involve the purchase of homes in qualified rural areas. Borrowers must meet certain income and credit requirements.
  • VA Loans. The VA provides a number of programs to assist veterans and their families with housing, including one type of loan directly from the VA. The VA also backs three types of loans, and these loans often require no down payment.

Conventional Mortgages

What is it? These are traditional commercial mortgages that aren’t backed by another entity such as the government.

Pros: If your credit is good enough and you have a large down payment, you might be able to score a low interest rate. You’ll also potentially save money because, with a 20 percent down payment, you won’t have to pay PMI.

Cons: Conventional mortgages typically require a credit score of 640 or more. You might also have to wait a longer period of time after a major negative item on your credit report—such as a bankruptcy—than you would have to wait when applying for government-backed loans.

Conforming Mortgages

What is it? Conforming mortgages are conventional mortgages that comply with standards set by Freddie Mac and Fannie Mae. These are two government-controlled agencies that buy commercial mortgages after they’ve been issued. The agencies pay the banks for the mortgages. The lenders then have more capital so they can fund new mortgages—it’s an effort that was started decades ago to help make homeownership more accessible.

Pros: The loans have to conform to standards, which means lenders must do some due diligence to ensure the borrower is not high risk. While that does mean you must have a decent credit score and debt-to-income ratio, it also means the loan will likely have a decent interest rate.

Cons: Conforming loans are limited to certain amounts. In 2020, the limit is $510,400 for single-family homes. The limits do vary slightly by location, with higher limits in especially expensive areas.

Jumbo Mortgages

What is it? Jumbo mortgages are those that surpass the limits set by Freddie Mac and Fannie Mae for conforming loans. In 2020, then, that would mean mortgages for more than $510,400 in most areas.

Pros: Jumbo mortgages allow you to get funding for expensive or luxury properties.

Cons: Because of the size of the loan and the fact that it’s not eligible for purchase by Freddie Mac or Fannie Mae, the underwriting process can be extensive. You may have to demonstrate excellent credit as well as produce a variety of financial documents.

Interest-Only Mortgages

What is it? This is a type of adjustable-rate mortgage (you’ll learn more about this in a moment) where you only pay toward the interest for the first few years of the loan. After the introductory period is over, you pay both interest and principle, which means your monthly payments likely go up. Your interest rate is also adjusted each year based on various economic factors.

Pros: Paying interest only can significantly lower your mortgage payment at the front end of your loan.

Cons: Your payment will go up and you won’t have a fixed interest rate. Depending on what the markets do, that could increase your costs unexpectedly.

Mortgage Interest Rates

Mortgage interest rates are typically fixed or adjustable. Which one you choose depends on your financial situation and the type of loan you can qualify for.

Fixed-Rate Mortgages

With this type of loan, your interest rate is set in the contract and doesn’t change over the years. The advantage of this is that you know exactly what you’re going to pay and what rate you have. The downside is that if you buy a home during a time when interest rates in the market are high, you might get stuck with a higher rate.

You can seek a lower rate by refinancing your mortgage, though you’ll have to pay closing costs and other fees, and your credit and income might be reviewed again. Many people do refinance to get a lower rate to save money if they have a better credit and financial situation than they did when they bought their home.

Adjustable-Rate Mortgages

In an adjustable-rate mortgage, or ARM, your rate is variable. That means it fluctuates periodically. How often the interest rate might change depends on your mortgage contract. The downside of an ARM is that you can be surprised with large interest rate hikes. The upside is that if you buy a home when interest rates are high, you might see a lower rate if the markets swing that direction in the future.

Mortgage Terms

Terms refer to how long you take out a mortgage loan for. Many options exist, but the two most common are summarized below.

15-Year Mortgages

This means that you borrow the money for 15 years. The benefits of a short-term mortgage like this are that you pay your home off and own it outright much faster, and you do so with significant interest savings. The downside is that by squeezing the mortgage into only 15 years, you will have much higher monthly payments.

30-Year Mortgages

This is what most people consider the traditional mortgage term. The benefit is that you spread your loan out over a longer period, so you pay less each month. The downside is that by stretching out your payments, you pay more in interest over the life of the loan.

How to Get the Best Loan Terms

To save money on your home purchase, you want the most favorable terms possible. That means you want the best length of time for your needs and a good interest rate. Try these tips to achieve your goal:

  • Ensure your credit score is good or excellent. If your credit score is lackluster, you might want to consider taking time to improve it before buying a home.
  • Have a decent down payment. Putting 20 percent down on a home keeps you from having to pay PMI, for example. But even putting 10 percent down might help you get better rates than if you put only three percent down.
  • Compare lenders and rates to find the best deal. Shopping around for a mortgage within a short period of time doesn’t hit your credit hard because generally, the credit bureaus consider multiple mortgage applications within a few weeks of each other to be a single inquiry.

Mortgages can be complicated, and there are a lot of professionals who can help you figure out which one is best for you. When it comes to working on your credit score, the team at Lexington Law might be able to help you out by investigating and disputing inaccurate negative items on your credit report. Get in touch with us today to find out more.


Reviewed by Alexis Peacock, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Alexis Peacock was born in Santa Cruz, California and raised in Scottsdale, Arizona. In 2013, she earned her Bachelor of Science in Criminal Justice and Criminology, graduating cum laude from Arizona State University. Ms. Peacock received her Juris Doctor from Arizona Summit Law School and graduated in 2016. Prior to joining Lexington Law Firm, Ms. Peacock worked in Criminal Defense as both a paralegal and practicing attorney. Ms. Peacock represented clients in criminal matters varying from minor traffic infractions to serious felony cases. Alexis is licensed to practice law in Arizona. She is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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Should you pay down debt or save for retirement?

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rebuilding credit

While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If you have high-interest debt, pay it down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If you’re nearing retirement, start to save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for both goals by improving income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



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How does a loan default affect my credit?

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loan default

Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.

Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.

30 days late

Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.

The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.

More than 30 days late

Payments that are more than 30 days past due can trigger increasingly serious consequences:

  • The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
  • You may receive phone calls and letters from creditors demanding payment.
  • If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.

Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.

Other ways a default can hurt you

Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:

  • If you default on a car loan, the creditor can repossess your car.
  • If you default on a mortgage, you could be forced to foreclose on your home.
  • In some cases, you could be sued for payment and have a court judgment entered against you.
  • You could face bankruptcy.

Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.

How to avoid a loan default

Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:

  • For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
  • For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.

Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.

Clean up your credit

The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.

Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



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How to identify credit repair scams

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you have poor or damaged credit and want to repair it, you may have considered using a credit repair service to help. Unfortunately, there are many companies and individuals that want to take advantage of unsuspecting consumers needing help with their credit. 

While there are legitimate companies that can help you repair your credit, there are also credit repair scams that are only after your money and your information for identity theft purposes. To keep both safe, we created this guide to help you tell the difference between legitimate credit repair companies and credit repair scams.

Five signs of a credit repair scam

There are many things credit repair companies are not allowed to do or promise customers. If it sounds like it’s too good to be true, it probably is, and you should steer clear of that company. We’ve put together a list of signs you should watch out for when working with credit repair companies.

1. Guaranteed results

Under the Credit Repair Organizations Act (CROA), credit repair companies cannot guarantee results. Here are a few common examples of false promises unethical credit repair companies might make:

  • Improvement to your credit score
  • Results in a fixed time period
  • Removal of all of negative items, even if they are accurate

2. Up-front payment is requested

The CROA prohibits credit repair companies from asking for any payment before they render services. Many scammers know that most consumers don’t know this and, as a result, promise a quick turnaround on credit repair for a large upfront payment.

Some illegitimate credit repair companies may not allow you to cancel unless you pay a fee. All credit repair companies are required by law to give you at least three days to cancel services with them and there is no penalty for canceling.

3. Claims a new identity is needed 

A credit repair company can’t promise or offer you a new identity. Anyone offering you a new identity is a fraud. Besides guaranteeing results, scammers may try to promise you a clean slate with a new Employer Identification Number (EIN) or a Credit Privacy Number (CPN).

They tell you to use these numbers on your future credit applications instead of your Social Security Number. We explain more about common credit repair scams below.

4. Don’t explain your legal rights

Credit repair companies should explain your legal rights to you from the beginning. These are a few common things an unethical credit repair company might do.

  • Tells you not to contact the credit bureaus directly
  • Doesn’t give you a copy of the contract to review before signing
  • Fails to inform you that you can repair your credit yourself without the help of a credit repair company
  • Leaves out important information from the contract, like the date services will be executed or the amount you will pay

If you feel like the company isn’t telling you everything or refusing to answer your questions, you should seek services elsewhere.

5. Asks you to misrepresent information

Finally, an unlawful credit repair company might ask you to misrepresent your information. This can range from unlawfully using an EIN or CPN number in place of your social security number to claim you are a victim of identity theft when you’re not.

five signs of a credit repair scam

Common credit repair scams 

You’ll most likely see credit repair companies illegally promising results. However, it’s important to familiarize yourself with other scams so you understand what is and is not legal. We highlighted a few common ones below.

File segregation schemes 

A file segregation scheme is when a company or individual offers to give you an Employee Identification Number (EIN) to use in place of your Social Security Number when you apply for credit. It’s illegal for companies to do this, and it’s illegal for consumers to obtain one to use in place of their Social Security Number. 

Credit privacy numbers 

Like an EIN, a Credit Privacy Number (CPN) is created by scammers to use in place of your Social Security Number when applying for credit. Simply put, a CPN is a fake Social Security Number. Usually, these are created using somebody else’s identity, and using one can be considered identity theft. 

Tradeline renting 

Tradeline renting is when you pay for authorized user status so that the tradeline shows up on your credit reports to improve your score. This doesn’t repair any negative information on your credit, but adding a positive tradeline to your credit report can boost your score.

While this isn’t necessarily illegal, it can get you into trouble. There is nothing wrong with a loved one adding you as an authorized user. However, if you pay to “rent” a tradeline from a stranger, you don’t know how it will impact your credit and it may be a scam to get your money. 

credit repair scams to watch out for

What to do if you are scammed

There are a few things you can do if you realize you’ve fallen victim to a credit repair scam. Take a look at your options below.

who to report a credit repair scam to

Can credit repair companies fix your credit?

Yes, a legitimate credit repair company can help you work to remove inaccurate negative items from your record that may be damaging your credit score. Here are ways to recognize a legitimate, expert credit repair company. Although you can work to repair your credit yourself without a credit repair company, ideally a credit repair company would make the process much easier. Here are some signs of a legitimate, expert credit repair company:

  1. They create a repair strategy custom to your unique situation. A good credit repair company will customize their course of action only after evaluating your credit reports and credit history. Everyone’s credit history is different, and their approach to repairing your credit should reflect that. 
  2. Maintain communication with you during the process. A credit repair company that maintains scheduled calls, emails or any other form of communication with you will help you stay up-to-date with their progress. They shouldn’t keep you in the dark as they’re conducting their services. 
  3. Informs you of your rights from the beginning. At the time of signing, a credit repair company should provide two documents: a disclosure of your right to repair your credit yourself and a detailed contract of services.
  4. Make realistic claims about their services. Like we said above, credit repair companies cannot guarantee results. A legitimate credit repair company will not guarantee timeframes or point changes, but they can guarantee the delivery of services—access to credit monitoring tools, or letters delivered on your behalf. 

How to safely repair your credit

Making payments on time and disputing inaccurate information on your credit reports can help you repair your credit. While you can do this on your own, a professional credit repair firm like Lexington Law Firm will make the process easier and more efficient.

Lexington Law Firm proudly adheres to CROA to make sure we give our clients the best experience possible. For over a decade, we’ve helped clients challenge information that is unfair, inaccurate and unsubstantiated. Give us a call today for a free, personalized credit report consultation.


Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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