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.
A loan “option” is always made up of three different things:
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:
- You are borrowing money and paying interest for a shorter amount of time.
- 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 | 2008–2014: Chosen by 10-15% 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.