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Exploring loan choices

Understand the different kinds of loans available

Not all home loans are the same. Knowing what kind of loan is most appropriate for your situation prepares you for talking to lenders and getting the best deal.

A loan has three elements:

  1. Loan type
  2. Loan term
  3. Interest rate type

1. Loan type

Conventional, government, or special program

Mortgage loans are organized into categories based on the size of the loan and whether they are part of a government program.

This choice affects:

  • How much you need for a down payment
  • The total cost of your loan, including interest and mortgage insurance
  • How much you can borrow, and the house price range you can consider

What to know

Choosing the right loan type

Each loan type is designed for different situations. Sometimes, only one loan type fits your situation. If multiple options fit your situation, try out scenarios and ask lenders to provide several quotes so you can see which type offers the best deal overall.

  • Majority of loans
  • Typically cost less than FHA loans but can be harder to get

Find details about conventional loans

  • FHA: Low down payment, available to those with lower credit scores
  • VA: For veterans, servicemembers, or surviving spouses
  • USDA: For low- to middle-income borrowers in rural areas
Special programs
  • State or Local Housing Agencies: Can be available to low- to middle-income borrowers, first-time homebuyers, or public service employees
  • Special Purpose Credit Programs: Loans from private lenders or low- to middle- income borrowers generally in targeted communities.

Find details about FHA loans

Find details about VA, USDA loans, and special programs

2. Loan term

30 years, 15 years, or other

The term of your loan is how long you have to repay the loan.

This choice affects:

  • Your monthly principal and interest payment
  • Your interest rate
  • How much interest you pay over the life of the loan

Compare your loan term options

Shorter term (15-year) Longer term (30-year)

🔴 Higher monthly payments

🟢 Lower monthly payments

🟢 Typically lower interest rates

🔴 Typically higher interest rates

🟢 Lower total cost

🔴 Higher total cost

What to know

Shorter loan terms generally save you money overall, but have higher monthly payments.

There are two reasons shorter terms can save you money:

  • You are borrowing money and paying interest for a shorter amount of time
  • The interest rate is usually lower—by as much as a full percentage point

However, a lot depends on the specifics – exactly how much lower the interest costs are, and how much higher the monthly payments could be, depends on which loan terms you're looking at as well as the interest rate. Rates vary among lenders, especially for shorter terms. Explore rates for different loan terms so you can tell if you're getting a good deal. Always compare official loan proposals, called Loan Estimates, before making your decision.

3. Interest rate type

Fixed rate or adjustable rate

Interest rates come in two basic types: fixed and adjustable.

This choice affects:

  • Whether your interest rate can change
  • Whether your monthly principal and interest payment can change and its amount
  • How much interest you pay over the life of the loan

Compare your interest rate options

Fixed rate Adjustable rate (ARM)

🟢 Lower risk, no surprises

🔴 Higher risk, uncertainty

🔴 Higher interest rate

🟢 Lower interest rate to start

Rate does not change

After initial fixed period, rate can increase or decrease based on the market

Monthly principal and interest payments stay the same

Monthly principal and interest payments can increase or decrease over time

2008–2022: Chosen by 85-95% of buyers
Historically: Chosen by 70-75% of buyers

2008–2022: Chosen by 5-15% of buyers
Historically: Chosen by 25-30% of buyers

What to know

Consider carefully what type of interest rate type make sense for your situation. Check the differences between a fixed-rate and adjustable-rate mortgage loan.

Fixed-rate mortgages

Most borrowers choose fixed-rate mortgages. Your monthly payments are more likely to be stable with a fixed-rate loan, so you might prefer this option if you value certainty about your loan costs over the long term. With a fixed-rate loan, your interest rate and monthly principal and interest payment stay the same. Your total monthly payment can still change—for example, if your property taxes, homeowner’s insurance, or mortgage insurance goes up or down.

Adjustable-rate mortgages (ARMs)

Most ARMs have two periods. During the introductory first period, your interest rate is fixed and won’t change. During the second period, your rate goes up and down regularly based on market changes. This means your monthly principal and interest payment could go up a lot, even double. Review how adjustable rates change. Some ARMs include rate caps, which are limits to how much rates can adjust. Find out more about ARM rate caps.

ARMs offer less predictability but could be cheaper in the short term. You might want to consider this option if, for example, you plan to move again within the initial fixed period of an ARM. In this case, future rate adjustments don’t affect you. However, if you end up staying in your house longer than expected, you could end up paying a lot more. Review what to look for when considering an ARM and consult our Consumer Handbook on Adjustable-Rate Mortgages .

Explore rates for different interest rate types and see for yourself how the initial interest rate on an ARM compares to the rate on a fixed-rate mortgage.

Loans are subject to government regulation

Generally, your lender must document and verify your income, employment, assets, debts, and credit history to determine whether you have the ability to repay the loan. If your lender does this and the loan follows certain criteria, it may be called a “qualified mortgage.” "Nonqualified mortgages” can be riskier or more expensive and are used when loans have unique characteristics that make them ineligible to be a qualified mortgage. These loans are sometimes marketed towards self-employed borrowers or borrowers without Social Security numbers.

How to avoid pitfalls

Check for risky features

Be careful if a loan has features that could surprise you in the future. Does the loan have a prepayment penalty, a balloon payment, negative amortization, or is it an interest-only loan? If any of these features are included in the loan, ask the loan officer why. Ask the lender to give you another Loan Estimate for a loan without the feature, so you can see the difference in costs for a loan with less risk to you.

Visit our sources page to learn more about the facts and numbers we reference.

The process and forms described on this page reflect mortgage regulations that apply to most mortgages.