Mortgage Types Explained: How to Choose the Right Home Loan
Shopping for a mortgage can feel like learning a foreign language. Fixed-rate, adjustable-rate, FHA, VA, conventional - what do these terms actually mean? Here's the truth: there's no single "best" mortgage. The right choice depends on your credit score, down payment, timeline, and comfort with risk.
Mortgage Basics
A mortgage has four main components: Principal (the amount you borrow), Interest (the cost of borrowing), Term (how long you'll repay - typically 15 or 30 years), and Monthly payment (principal + interest + taxes + insurance). Example: On a $280,000 loan at 7% for 30 years, your principal + interest is $1,862/month.
Fixed-Rate Mortgages
Your interest rate never changes for the entire loan term. If you lock in 7%, your payment stays the same for all 360 months. 90% of buyers choose 30-year fixed-rate mortgages for their predictability.
30-Year vs 15-Year Fixed
| Term | Monthly Payment | Total Interest Paid |
|---|---|---|
| 30 years | $1,862 | $390,320 |
| 15 years | $2,516 | $172,880 |
Adjustable-Rate Mortgages (ARMs)
ARMs have a rate that changes over time. They're structured as 5/1, 7/1, or 10/1: the first number is how long your rate is fixed, the second is how often it adjusts after. Lower initial rates but future uncertainty. Best if you plan to sell or refinance before the adjustment period.
FHA Loans
Government-backed loans with lower requirements. Minimum 3.5% down with 580+ credit score. Mortgage insurance required for the life of the loan. Good for lower credit scores or smaller down payments.
VA Loans
$0 down payment, no monthly mortgage insurance, no loan limits for eligible veterans. The best deal available if you qualify. One-time funding fee (2.15% for first use) can be rolled into the loan.
USDA Loans
$0 down payment for eligible rural/suburban properties. Income limits apply (typically up to 115% of area median income). Low mortgage insurance (0.35% annually).
Conventional Loans
Not government-backed. Minimum 3-5% down for first-time buyers, 620+ credit score. PMI required below 20% equity but can be removed once you reach 20%. No upfront funding fees.
Credit Score Impact on Rates
| Credit Score | Rate Impact |
|---|---|
| 760+ | Best available rates |
| 700-759 | +0.25% above best |
| 680-699 | +0.50% above best |
| 660-679 | +0.75% above best |
| 640-659 | +1.00% above best |
| 620-639 | +1.50% above best |
Bottom Line
A 100-point difference in credit score can mean $60,000+ in additional interest over the life of a $300,000 loan.
Key Takeaways
- Fixed-rate mortgages provide payment predictability - best for most first-time buyers
- FHA loans are great for lower credit scores or smaller down payments
- VA loans offer the best terms for qualifying veterans
- Conventional loans let you drop PMI at 20% equity
- Your credit score significantly impacts your interest rate