Loading...
Loading...
Fixed or adjustable? Conventional, FHA, or VA? 15 or 30 years? These decisions shape your payment for decades. Here's everything decoded — clearly.
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.
Each loan type has different rules, requirements, and trade-offs.
| Loan Type | Min. Credit Score | Min. Down Payment | Mortgage Insurance | Best For |
|---|---|---|---|---|
| Conventional (most common) | 620 (740+ for best rates) | 3% | Yes, if < 20% down — cancels at 20% equity | Borrowers with good credit and stable income |
| FHA (first-time friendly) | 580 (500 with 10% down) | 3.5% | MIP for life of loan (if < 10% down) — big long-term cost | Lower credit scores or smaller down payments |
| VA (veterans only) | No VA minimum (lenders set ~620) | 0% | None — ever | Active military, veterans, surviving spouses |
| USDA (rural/suburban) | 640 | 0% | Guarantee fee (1%) upfront + 0.35% annual | Moderate-income buyers in eligible areas |
| Jumbo (high-cost areas) | 700-720 minimum | 10-20% | Varies by lender | High-income buyers in expensive markets (CA, NY, WA) |
Conventional note: Below 740 score means higher rates and PMI costs. Loan limit is $766,550 (2024 conforming limit).
FHA note: MIP for life of loan makes it expensive long-term — refinance out when you hit 20% equity. Loan limits vary by county, typically $498,257-$1,149,825.
VA note: Funding fee (1.25%-3.3% of loan) applies unless exempt due to disability. No loan limit for eligible veterans with full entitlement.
USDA note: Location eligibility is strict — check USDA's map at usda.gov. Income limits apply, typically ≤ 115% of area median income.
Jumbo note: Stricter underwriting — reserves, income, and documentation requirements are higher.
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.
"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%.
| Concept | Detail |
|---|---|
| What 1 point costs | 1% of loan amount paid upfront to permanently lower your interest rate |
| Example on $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 |
| Worked 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.
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 Takeaway: For most buyers, a 30-year fixed conventional loan is the right call — predictable, flexible, widely available. If you're a veteran, a 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, so plan to refinance. Never choose an ARM unless you're certain you'll sell or refinance before the fixed period ends, and always shop at least 3 lenders — every 0.25% matters enormously.
It means the rate is fixed for 5 years, then adjusts every 1 year after that based on market rates — useful for buyers planning to sell or refinance before the fixed period ends.
Unlike conventional loans, FHA's MIP (with less than 10% down) doesn't automatically cancel at 20% equity — most borrowers need to refinance into a conventional loan to remove it once they qualify.
Generally yes — 0% down and no mortgage insurance ever make it one of the strongest loan options available, though a one-time funding fee applies unless the borrower is exempt due to disability.
Not necessarily — many financial planners recommend a 30-year loan and investing the payment difference, since historical market returns have often outpaced mortgage interest rates, though a 15-year offers faster, guaranteed debt payoff.
Calculate the break-even point (upfront cost ÷ monthly savings) and compare it to how long you plan to stay in the home — if you'll stay well past the break-even point, points are usually worth it.
Rates and fees vary significantly between lenders even on the same day, and Freddie Mac research shows getting 5 quotes instead of 1 saves borrowers an average of $3,000 over the life of the loan — comparing the APR, not just the rate, captures the full cost difference.
Disclaimer: This article is for general educational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Figures, rates, and rules mentioned may change over time — verify current details with an official source or a qualified professional before making financial decisions.