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Understand loan options

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.

Use our guide to understand how these choices affect your monthly payment, your overall costs both upfront and over time, and your level of risk. 

A loan "option" is always made up of three different things:


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 will pay over the life of the loan

Compare your loan term options

Shorter term

Longer term

 Higher monthly payments

 Lower monthly payments

 Typically lower interest rates

 Typically higher interest rates

 Lower total cost

 Higher total cost


In general, the longer your loan term, the more interest you will pay. Loans with shorter terms usually have lower interest costs but higher monthly payments than loans with longer terms. But a lot depends on the specifics – exactly how much lower the interest costs and how much higher the monthly payments could be depends on which loan terms you're looking at as well as the interest rate.

What to know

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

There are two reasons shorter terms can save you money:

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

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 offers, called Loan Estimates, before making your decision.

Some lenders may offer balloon loans. 

Balloon loan monthly payments are low, but you will have to pay a large lump sum when the loan is due. Learn more about balloon loans


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 will pay over the life of the loan

Compare your interest rate options

Fixed rate

Adjustable rate

 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

2008–2014: Chosen by 85-90% of buyers
Historically: Chosen by 70-75% of buyers

2008–2014: Chosen by 10-15% of buyers
Historically: Chosen by 25-30% of buyers


What to know

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 will stay the same. Your total monthly payment can still change—for example, if your property taxes, homeowner’s insurance, or mortgage insurance might go up or down.

Adjustable-rate mortgages (ARMs) offer less predictability but may be cheaper in the short term. You may 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 may not affect you. However, if you end up staying in your house longer than expected, you may end up paying a lot more. In the later years of an ARM, your interest rate changes based on the market, and your monthly principal and interest payment could go up a lot, even double. Learn more

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.

Understanding adjustable-rate mortgages (ARMs)

Most ARMs have two periods. During the 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. Learn more about how adjustable rates change. Most ARMs have a 30-year loan term.

Here's how an example ARM would work:

fixed rate transitions to adjustable rate

5 / 1 Adjustable rate mortgage (ARM)

Fixed period

Adjustable period

This “5” is the number of years your initial interest rate will stay fixed. This “1” is the how often your rate will adjust after the fixed period ends.
Common fixed periods are 3, 5, 7, and 10 years.

The most common adjustment period is “1,” meaning you will get a new rate and new payment amount every year once the fixed period ends. Other, less common adjustment periods include "3" (once every 3 years) and "5" (once every 5 years). You will be notified in advance of the change.


ARMs can have other structures.

 Some ARMs may adjust more frequently, and there’s not a standard way that these types of loans are described. If you’re considering a nonstandard structure, make sure to carefully read the rules and ask questions about when and how your rate and payment can adjust.

Understand the fine print. 

ARMs include specific rules that dictate how your mortgage works. These rules control how your rate is calculated and how much your rate and payment can adjust. Not all lenders follow the same rules, so ask questions to make sure you understand how these rules work.

ARMs marketed to people with lower credit scores tend to be riskier for the borrower.

 If you have a credit score in the mid-600s or below, you might be offered ARMs that contain risky features like higher rates, rates that adjust more frequently, pre-payment penalties, and loan balances that can increase. Consult with multiple lenders and get a quote for an FHA loan as well. Then, you can compare all your options.


Loan type

Conventional, FHA, or special programs

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 will 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

Choosing the right loan type

Each loan type is designed for different situations. Sometimes, only one loan type will fit 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.

Conventional

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

Get all the details

FHA

  • Low down payment
  • Available to those with lower credit scores

Get all the details

Special programs

  • VA: For veterans, servicemembers, or surviving spouses
  • USDA: For low- to middle-income borrowers in rural areas
  • Local: For low- to middle-income borrowers, first-time homebuyers, or public service employees

Get all the details

Loans are subject to basic government regulation. 

Generally, your lender must document and verify your income, employment, assets, debts, and credit history to determine whether you can afford to repay the loan.

Learn more about the CFPB's mortgage rules

Ask lenders if the loan they are offering you meets the government’s Qualified Mortgage standard. 

Qualified Mortgages are those that are safest for you, the borrower.


Mortgage insurance: what you need to know

Mortgage insurance helps you get a loan you wouldn’t otherwise be able to.

If you can’t afford a 20 percent down payment, you will likely have to pay for mortgage insurance. You may choose to get a conventional loan with private mortgage insurance (PMI), or an FHA, VA, or USDA loan.

Mortgage insurance usually adds to your costs.

Depending on the loan type, you will pay monthly mortgage insurance premiums, an upfront mortgage insurance fee, or both.

Mortgage insurance protects the lender if you fall behind on your payments. It does not protect you.

Your credit score will suffer and you may face foreclosure if you don’t pay your mortgage on time.

Learn more about mortgage insurance

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