Complete Guide to Mortgage Types in the United States

30-Year Fixed-Rate Mortgage

The 30-year fixed-rate mortgage is the most popular home loan in America. With this mortgage, your interest rate remains constant for the entire 30-year term, providing predictable monthly payments that make budgeting easier.

How It Works

You borrow a set amount and repay it over 360 monthly payments (30 years × 12 months). Your interest rate never changes, so your principal and interest payment stays the same throughout the loan. However, the amount going toward principal vs. interest shifts over time - early payments are mostly interest, while later payments are mostly principal.

Example: $300,000 at 6.5%

• Monthly Payment (P&I): $1,896
• Total Interest Paid: $382,633
• Total Amount Paid: $682,633
• Year 1: ~$19,000 interest vs. ~$3,700 principal
• Year 30: ~$1,500 interest vs. ~$21,200 principal

Advantages

• Lower monthly payments: Spreading payments over 30 years results in the lowest possible monthly payment
• Payment stability: Lock in your rate for three decades, protecting against rising interest rates
• Easier qualification: Lower payments mean lower DTI, making it easier to qualify
• Cash flow flexibility: Lower required payment frees up money for investments, savings, or other goals
• Inflation hedge: Fixed payment becomes relatively cheaper over time as wages increase

Disadvantages

• Higher total interest: You'll pay significantly more interest over 30 years vs. shorter terms
• Slower equity building: In early years, most of your payment goes to interest, not equity
• Higher interest rates: Typically 0.5-0.75% higher than 15-year mortgages
• Longer debt commitment: 30 years is a very long time to be in debt
• Underwater risk: Slower equity building means you could owe more than the home is worth if values drop

Best For

• First-time homebuyers who need lower monthly payments to qualify
• Buyers in expensive markets where homes cost significantly more than income supports
• Those planning to stay in their home for 7+ years
• Borrowers who want to maximize cash flow for other investments
• People who prefer payment predictability and protection from rate increases
• Buyers who can discipline themselves to invest the payment difference vs. a 15-year

15-Year Fixed-Rate Mortgage

A 15-year fixed mortgage offers a shorter repayment period with significantly lower interest rates. While monthly payments are higher, you'll build equity faster and pay substantially less interest over the loan's lifetime.

How It Works

You repay your loan over 180 monthly payments (15 years × 12 months). Like the 30-year, your rate is fixed for the entire term. The shorter timeframe means higher monthly payments but dramatically less total interest.

Example: $300,000 at 5.75% (typically 0.5-0.75% lower than 30-year)

• Monthly Payment (P&I): $2,489
• Total Interest Paid: $147,974
• Total Amount Paid: $447,974
• Payment is ~$593 higher per month than 30-year
• But you save $234,659 in interest!

Advantages

• Lower interest rates: Typically 0.5-0.75% less than 30-year mortgages
• Massive interest savings: Save $100,000-$200,000+ over the life of the loan
• Pay off home in half the time: Own your home outright 15 years sooner
• Build equity much faster: More of each payment goes to principal from day one
• Less total debt burden: Significantly less money paid to lenders overall
• Financial freedom sooner: No mortgage payment in 15 years opens up options

Disadvantages

• Higher monthly payments: Typically 30-50% higher than 30-year mortgages
• Less monthly flexibility: Higher required payment leaves less room in budget
• May qualify for less: Higher payments mean higher DTI, potentially lower loan amounts
• Opportunity cost: Money in your house can't be invested elsewhere
• Less liquid: Harder to access home equity without refinancing or HELOC

Best For

• Homeowners with stable, higher incomes who can afford larger monthly payments
• Those approaching retirement (age 45-55) who want to own their home before retiring
• Buyers refinancing who want to pay off their mortgage faster
• People who hate debt and want to minimize total interest paid
• Those with high job security and predictable income
• Borrowers with low other debts who can handle higher housing payments

30-Year vs. 15-Year: The Math

On a $300,000 loan, the difference is dramatic:

• Monthly payment difference: ~$593 more for 15-year
• Interest savings: $234,659
• That's like earning $1,564/month for 15 years by choosing the 15-year!
• After 15 years: 15-year loan is paid off, 30-year still owes ~$185,000

Adjustable-Rate Mortgages (ARM)

An ARM starts with a fixed interest rate for an initial period (typically 3, 5, 7, or 10 years), then adjusts periodically based on market conditions. Common ARMs include 5/1 ARM (fixed for 5 years, then adjusts annually) or 7/1 ARM (fixed for 7 years, then annual adjustments).

How It Works

ARMs have two phases:

• Initial fixed period: Your rate is locked (e.g., 5, 7, or 10 years)
• Adjustment period: Rate adjusts based on an index (like SOFR) plus a margin

For example, a 7/1 ARM has a fixed rate for 7 years, then adjusts once per year for the remaining 23 years.

Understanding ARM Structure

Index + Margin = Your Rate

• Index: A benchmark rate that moves with the market (SOFR, Treasury, etc.)
• Margin: The lender's markup (typically 2-3%), stays constant
• Example: If SOFR is 4% and margin is 2.5%, your adjusted rate is 6.5%

Rate Caps Protect You

ARMs have caps limiting how much rates can increase:

• Initial adjustment cap: How much the rate can increase at first adjustment (typically 2-5%)
• Periodic adjustment cap: Maximum increase per adjustment period (typically 2%)
• Lifetime cap: Maximum rate over the loan's life (typically 5% above start rate)

Example: 5/1 ARM starting at 5.5% with 2/2/5 caps

• Year 5 first adjustment: Can't exceed 7.5% (5.5% + 2%)
• Each subsequent year: Can't increase more than 2% per year
• Lifetime maximum: 10.5% (5.5% + 5%)

Example: 7/1 ARM at $300,000

• Initial rate: 5.875% (lower than 30-year fixed)
• Years 1-7 payment: $1,776/month (saving $120/mo vs. 30-year fixed)
• Total savings in 7 years: ~$10,000+ if you sell before adjustment
• After year 7: Rate adjusts based on market (could go up or down)
• If rates rise to 7.5%: Payment increases to ~$2,100/month

Advantages

• Lower initial interest rates: Typically 0.5-1% less than 30-year fixed
• Lower initial monthly payments: Save money during the fixed period
• Potential to save thousands: If you sell or refinance before adjustment
• Benefit from falling rates: If rates decline, your payment may decrease after adjustment
• Good for short-term homeowners: Perfect if you plan to move within 5-7 years

Disadvantages

• Payment uncertainty: You don't know what your payment will be after the fixed period
• Potential for much higher payments: If rates rise significantly, so does your payment
• Budgeting difficulty: Hard to plan long-term with variable payments
• Refinance risk: If home values drop or credit worsens, you may not be able to refinance
• More complex: Harder to understand and compare than fixed-rate mortgages
• Stress: Worry about rate increases can cause financial anxiety

Best For

• Buyers who plan to sell or refinance within the initial fixed period (5-7 years)
• Those expecting significant income increases (doctors finishing residency, etc.)
• Homeowners in declining or stable rate environments
• Jumbo loan borrowers seeking lower initial payments on expensive properties
• Military families who move frequently (every 3-5 years)
• Real estate investors planning to flip or sell within a few years

When to Avoid ARMs

• You plan to stay in the home long-term (10+ years)
• You have a tight budget with no room for payment increases
• You prefer payment certainty and hate financial uncertainty
• Interest rates are at historic lows (likely to rise)
• You're on a fixed income (retirees) without room for increases

Which Mortgage Type Should You Choose?

Choose a 30-Year Fixed if:

• You need the lowest possible monthly payment to qualify or fit your budget
• You're buying in an expensive market where a 15-year payment isn't affordable
• You want maximum cash flow flexibility for other investments or goals
• You prefer predictability and protection from rising interest rates
• You plan to invest the payment difference in higher-return investments

Choose a 15-Year Fixed if:

• You have stable income and can comfortably afford the higher payment
• You want to save $100,000+ in interest and own your home sooner
• You're 45-55 years old and want to be mortgage-free before retirement
• You hate debt and want to minimize total interest paid
• You're refinancing and want to accelerate your payoff

Choose an ARM if:

• You're confident you'll sell or refinance within 5-7 years
• You expect significant income increases in the near future
• You want to save money now and can handle potential rate increases later
• You're buying a jumbo loan and need a lower initial payment
• Interest rates are high now but expected to decline