Fixed Rate vs. Adjustable Rate (ARM)
This is the first decision. A fixed-rate mortgage locks your interest rate forever. An ARM gives you a lower rate for an intro period (5, 7, or 10 years), then adjusts annually based on market rates.
| Fixed Rate | ARM | |
|---|---|---|
| Rate | Locked for life of loan | Fixed for intro period, then adjusts |
| Predictability | 100% — same payment every month | Payment can rise or fall after intro |
| Initial rate | Higher than ARM intro rate | Lower — the "teaser" rate |
| Best for | Long-term owners (5+ years) | Short-term owners or rate-drop bettors |
| Risk | None — you own the rate forever | Rate could spike if you stay long-term |
| Current popularity | ~90% of buyers choose this | ~10% — mostly sophisticated buyers |
A 5/1 ARM means fixed for 5 years, then adjusts every 1 year. If you're buying a "starter home" you plan to sell in 4 years, it can save money. If you might stay longer, the risk isn't worth it.
Loan Types — Which One Is Right for You?
Each loan type has different rules, requirements, and trade-offs.
Conventional (Most common)
- Min. Credit Score: 620 (740+ for best rates)
- Min. Down Payment: 3%
- Mortgage Insurance: Yes, if < 20% down — cancels at 20% equity
- Loan Limits: $766,550 (2024 conforming limit)
Best for: Borrowers with good credit and stable income
Below 740 score means higher rates and PMI costs
FHA Loan (First-time friendly)
- Min. Credit Score: 580 (500 with 10% down)
- Min. Down Payment: 3.5%
- Mortgage Insurance: MIP for life of loan (if < 10% down) — big long-term cost
- Loan Limits: Varies by county — typically $498,257–$1,149,825
Best for: Lower credit scores or smaller down payments
MIP for life of loan makes it expensive long-term — refinance out when you hit 20% equity
VA Loan (Veterans only)
- Min. Credit Score: No VA minimum (lenders set ~620)
- Min. Down Payment: 0%
- Mortgage Insurance: None — ever
- Loan Limits: No limit for eligible veterans with full entitlement
Best for: Active military, veterans, surviving spouses — best loan available if you qualify
Funding fee (1.25%–3.3% of loan) applies unless exempt due to disability
USDA Loan (Rural / suburban)
- Min. Credit Score: 640
- Min. Down Payment: 0%
- Mortgage Insurance: Guarantee fee (1%) upfront + 0.35% annual — lower than FHA MIP
- Loan Limits: Income limits apply — typically ≤ 115% of area median income
Best for: Moderate-income buyers in eligible rural/suburban areas
Location eligibility is strict — check USDA's map at usda.gov
Jumbo Loan (High-cost areas)
- Min. Credit Score: 700–720 minimum
- Min. Down Payment: 10–20%
- Mortgage Insurance: Varies by lender
- Loan Limits: Above $766,550 conforming limit
Best for: High-income buyers in expensive markets (CA, NY, WA)
Stricter underwriting — reserves, income, and documentation requirements are higher
15-Year vs. 30-Year Mortgage
Both are fixed-rate — the difference is how fast you pay it off and how much total interest you pay. On a $350,000 loan, a 15-year saves roughly $150,000+ in interest vs. a 30-year — but your monthly payment is ~$800 higher.
| 15-Year | 30-Year (most common) | |
|---|---|---|
| Monthly payment | Higher (~$700–900 more/mo) | Lower — more cash flow flexibility |
| Total interest paid | Much less — roughly half | Significantly more over time |
| Interest rate | Lower by 0.5%–0.75% | Higher rate |
| Equity build speed | Fast — paid off in 15 years | Slow — first years mostly interest |
| Flexibility | Less — locked into high payment | More — can always pay extra |
| Best for | High income, low other debt | Most buyers — invest the difference |
Most financial planners recommend the 30-year and investing the payment difference in index funds — historically the market outpaces your mortgage interest rate. But if debt-freedom is your priority, 15-year is emotionally and mathematically powerful.
Mortgage Points — Should You Buy Them?
"Buying down your rate" means paying extra upfront at closing to get a lower interest rate permanently. Each point costs 1% of the loan and typically reduces the rate by ~0.25%.
- 1 point = 1% of loan amount paid upfront to permanently lower your interest rate.
- On a $400K loan, 1 point = $4,000 paid at closing to reduce your rate by ~0.25%.
- Break-even calculation: upfront cost ÷ monthly savings = months to break even.
- Example: $4,000 cost ÷ $60/month savings = 67 months (5.5 years) to break even.
- Only buy points if you're confident you'll stay in the home past the break-even point.
Always Shop at Least 3 Lenders. Freddie Mac research shows that getting 5 loan quotes instead of 1 saves borrowers an average of $3,000 over the life of the loan. Rates and fees vary significantly between banks, credit unions, and mortgage brokers — even on the same day. Get a Loan Estimate (LE) from each lender and compare the APR, not just the rate.
Key Takeaways
- For most buyers: 30-year fixed conventional is the right call — predictable, flexible, widely available.
- If you're a veteran: VA loan is almost always superior — 0% down, no PMI, competitive rates.
- FHA is good for lower credit/down payment but MIP for life is an expensive trade-off — plan to refinance.
- Never choose an ARM unless you're certain you'll sell or refinance before the fixed period ends.
- Shop at least 3 lenders — rates vary more than most buyers realize, and every 0.25% matters enormously.