Finding the right loan

You'll want to work closely with your lender to find the right mortgage for you.

Choosing the right mortgage means doing your homework to fully understand the different types of loans and how each can make a difference in your monthly payments and the overall cost of your loan. With many different mortgage products available, there is no one size that fits all.

To ensure you obtain a mortgage that’s right for you, talk with your lender about your short- and long-term personal and financial goals. Also consider discussing your options with a certified housing counselor.

Fixed-rate mortgages

Fixed-rate mortgages are the most common type of mortgage. With a fixed-rate mortgage, your interest rate will be locked in for the life of the loan. This means your monthly mortgage payments will remain the same for the entire term of the loan, whether it's a 15-, 20- or 30-year mortgage.

The primary benefit of fixed-rate mortgages is inflation protection, meaning that if mortgage rates increase, your mortgage rate will not change.

Things you may want to consider with a fixed-rate mortgage:

  • Your interest rate won't change if rates go up or down. Your rate is locked in and will remain the same for the duration of your loan term. This is good news if rates go up. If rates go down enough, you can consider refinancing your mortgage, if it makes financial sense.

  • Your monthly mortgage payment may still change each year. Your mortgage payment is comprised of principal, interest, taxes and insurance. Even though your principal and interest payment (typically the bulk of the payment) will not change over the life of your loan, your taxes and insurance may be different each year, resulting in changes to your monthly payment.

When selecting the term of a fixed-rate mortgage, it is important to understand the features and benefits of each. Most mortgage lenders offer at least two basic terms: 15 years and 30 years. Many also offer 20-year fixed-rate mortgages, and some lenders offer even more term options.

  • 30-year term: With this term, your monthly payment will be lower due to the extended period of the loan. Interest rates are typically higher and you pay more interest over time.

  • 15-year term: This term has higher monthly payments because the loan term is shorter. However, you can build equity faster than with a 30-year fixed-rate mortgage and pay less interest over the life of your loan. Interest rates are also typically lower for this term.

Adjustable-rate mortgages (ARMs)

An adjustable-rate mortgage (ARM) is a loan with an interest rate that will change throughout the life of the loan. An ARM may start out with lower monthly payments than a fixed-rate mortgage, but you should know that:

  • Your monthly payments may go up over time, and you will need to be financially prepared for the adjustments.

  • Your payments may not go down much, or at all, even if interest rates drop.

  • You might incur a penalty if you try to pay off the loan early in the hope of avoiding higher payments.

All ARMs have an initial period during which the interest rate doesn't change — ranging from six months to 10 years — with three years, five years and seven years being the most common. After the initial period, most ARMs adjust.

To help you understand how ARMs work, consider the following example:

A 3/1 ARM has a fixed interest rate for the first three years. After three years, the rate can change once every year for the remaining life of the loan. The same principle applies for 5/1 and 7/1 ARMs. If the rates increase, your monthly payments will increase. If rates go down, your payments may not decrease, depending upon your initial interest rate.

Most ARMs also typically feature an adjustment cap, which limits how much the interest rate can go up or down at each adjustment period. For instance:

A 7/1 ARM with a 5/2/5 cap structure means that for the first seven years, the rate is unchanged, but on the eighth year your rate can increase by a maximum of 5 percentage points (the first "5") above the initial interest rate. Every year thereafter, your rate can adjust a maximum of 2 percentage points (the second number, "2"), but your interest rate can never increase more than 5 percentage points (the last number, "5") throughout the life of the loan.

When considering an ARM, ask yourself:

  • If the mortgage rate increases, can I afford a higher mortgage payment? Use our adjustable-rate mortgage calculator to estimate how a higher mortgage rate can impact your mortgage payment.

  • Do I plan to live in my home for less than five years, or less than the adjustment period? If yes, this mortgage may be right for you.

To determine the best type of loan for your situation, lean on your lender or financial professional for guidance.