15-year fixed-rate vs. 30-year fixed-rate mortgage
A 30-year fixed-rate mortgage is the most popular type of mortgage because of its affordability and stability. Meanwhile, the 15-year fixed-rate mortgage typically comes with a lower interest rate when compared with a 30-year loan. The trade-off with a 15-year term is a significantly higher monthly payment, however, because your repayment term is cut in half.
Bottom line:
- A 30-year fixed-rate mortgage is the best choice if you want the lowest predictable monthly mortgage payment.
- A 15-year fixed-rate mortgage is the best option if can afford the higher payment and want to pay your loan off quicker.
5/1 ARM vs. 30-year fixed-rate mortgage
The 5/1 adjustable-rate mortgage (ARM) can be similar to the 30-year fixed-rate mortgage in that it can also have a 30-year repayment term, but there are other terms available. What sets 5/1 ARMs apart is that the interest rate is only fixed for the first five years of the term, and then the rate adjusts annually for the remaining 25 years.
Mortgage rates on 5/1 ARMs are often lower than rates on 30-year fixed loans. When the rate starts adjusting after the fixed period ends, it could go up or down. If your rate increases, you’ll need to be financially prepared to either absorb a higher monthly payment amount or refinance into a fixed-rate mortgage.
Bottom line:
- A 5/1 ARM makes sense if you plan to move or refinance before the low-rate initial period ends.
- A 30-year fixed-rate mortgage is best if you don’t want any fluctuations in your monthly house payment.
10/1 ARM vs. 5/1 ARM
A 10/1 adjustable-rate mortgage has a longer initial fixed-rate period than a 5/1 ARM. You’d enjoy a stable interest rate for the first 10 years and have a fluctuating rate for the remaining 20 years. A 10/1 ARM might work best for you if you plan to sell your home or apply and qualify for a refinance before the fixed-rate period ends.
Bottom line:
- A 10/1 ARM is worth if you want a lower payment than current 30-year fixed-rate mortgages and prefer a longer time period before the rate adjusts.
- A 5/1 ARM is typically the best way to go if you want bigger savings than the 10/1 ARM rates allow and plan to move or refinance before the initial low-rate period is over.
What are the different types of mortgages?
There are five main types of mortgages:
- Conventional loans. These loans often require a minimum 620 credit score and 3% down payment. Borrowers who put down less than 20% must pay for private mortgage insurance.
- FHA loans. You may qualify for an FHA loan, which is insured by the Federal Housing Administration (FHA), with as low as a 500 credit score and 10% down payment. You’d only need to put 3.5% down if you have a 580 score or higher.
- VA loans. The U.S. Department of Veterans Affairs (VA) guarantees VA loans to finance homes for military service members, veterans and eligible surviving spouses. Many lenders prefer a 620 credit score and there’s often no down payment required.
- USDA loans. These loans are backed by the U.S. Department of Agriculture (USDA) and cater to homebuyers in designated rural areas. You’re typically not required to make a down payment, but you’ll need to meet income requirements. In many cases, you’ll need a minimum 640 credit score.
- Non-conforming loans. Also known as “jumbo loans,” non-conforming loans have amounts that exceed conforming loan limits set by Fannie Mae and Freddie Mac. Non-conforming loans usually require a minimum 680 to 700 credit score and 20% down payment.