Mortgages: Fixed vs Adjustable, 15-Year vs 30-Year, and How to Get the Best Rate

Fixed-Rate vs Adjustable-Rate Mortgages

Fixed-Rate Mortgage (FRM)

The interest rate is fixed for the entire loan term. Monthly principal and interest payments never change. A fixed-rate mortgage is the most popular choice, accounting for over 90% of home loans in recent years. It offers predictability and protection against rising rates. If rates drop significantly, you can refinance. The trade-off is that fixed rates are typically 0.5% to 1% higher than the initial rate on an ARM. Fixed-rate mortgages are best for buyers who plan to stay in the home for 7+ years, want payment stability, or believe rates will rise in the future. The most common fixed-rate terms are 15-year, 20-year, and 30-year.

Adjustable-Rate Mortgage (ARM)

The interest rate is fixed for an initial period, then adjusts periodically based on a benchmark index plus a margin. A 5/1 ARM has a fixed rate for 5 years, then adjusts annually. 7/1 and 10/1 ARMs offer longer fixed periods. The initial ARM rate is typically 0.5% to 1% below a comparable fixed rate. After the fixed period, the rate can increase or decrease based on the index (usually SOFR). Most ARMs have caps limiting how much the rate can increase per adjustment (typically 2%) and over the life of the loan (typically 5% to 6%). ARMs are best for buyers who plan to move within 5-7 years, expect rates to decline, or want lower initial payments to qualify for a larger loan. The risk is that rates may be significantly higher when the fixed period ends.

Loan Term: 15-Year vs 20-Year vs 30-Year

30-Year Mortgage

The 30-year fixed-rate mortgage is the most popular choice for homebuyers. Monthly payments are the lowest of any standard term, making it the most affordable option month-to-month. However, you pay the most total interest over the life of the loan. At 6.5% on a $400,000 loan, the monthly payment is $2,528 and total interest is $510,000. The 30-year term is best for first-time buyers, those with tight monthly budgets, and buyers who want maximum cash flow flexibility. You can always make extra principal payments to shorten the effective term and save interest — the 30-year gives you the flexibility to pay less when needed and more when you can.

15-Year Mortgage

The 15-year fixed-rate mortgage offers a lower interest rate (typically 0.5% to 0.75% below 30-year rates) and builds equity much faster. At 5.75% on a $400,000 loan, the monthly payment is $3,320 and total interest is $198,000. The payment is approximately 31% higher than the 30-year, but you save $312,000 in interest and own the home free and clear in half the time. The 15-year mortgage is best for buyers with stable, high income who can afford the higher payment, are within 10-15 years of retirement, or want to minimize total interest paid. Some buyers use a 15-year as a forced savings vehicle — the higher payment builds equity automatically.

20-Year Mortgage

The 20-year mortgage is a middle ground between 15 and 30 years. Rates are slightly higher than 15-year but lower than 30-year. Payments are about 15% higher than a 30-year but 15% lower than a 15-year. The 20-year term offers a good balance for buyers who want to build equity faster than a 30-year without the payment shock of a 15-year. At 6% on a $400,000 loan, monthly payment is $2,865 and total interest is $287,000 — saving $223,000 in interest compared to a 30-year at 6.5%. Learn how your credit score affects mortgage rates →

Loan Types

Conventional Loans

Conventional loans conform to Fannie Mae and Freddie Mac guidelines and limits ($766,550 for single-family homes in most areas in 2024, higher in high-cost areas). They require a minimum credit score of 620 and a down payment as low as 3% for first-time buyers, but private mortgage insurance (PMI) is required below 20% down. PMI costs 0.3% to 1.5% of the loan amount annually and is automatically cancelled once you reach 22% equity. Conventional loans offer the lowest rates for borrowers with excellent credit (740+) and large down payments. Jumbo loans exceed conforming limits and have stricter requirements — typically 700+ credit score, 10-20% down, and higher rates.

FHA Loans

Federal Housing Administration (FHA) loans require only 3.5% down with a credit score of 580 or higher. (10% down if score is 500-579.) FHA loans are more lenient on debt-to-income ratios, allowing up to 57% in some cases. The trade-off is that FHA mortgage insurance is required for the life of the loan if you put down less than 10%, or for 11 years if 10%+ down. FHA MIP (Mortgage Insurance Premium) includes an upfront fee of 1.75% of the loan amount plus an annual fee of 0.55% to 0.85%. FHA loans are best for first-time buyers with limited down payment savings or credit scores below 700. Once you have 20% equity, you can refinance to a conventional loan to remove mortgage insurance.

VA Loans

VA loans are available to active-duty military, veterans, and qualifying spouses. They offer 0% down payment, no mortgage insurance, limited closing costs, and no credit score minimum (though most lenders require 620+). The VA funding fee ranges from 1.25% to 3.3% depending on down payment and whether it is your first use, but is waived for disabled veterans. VA loans have more flexible underwriting and are assumable by future buyers. The VA loan is widely considered the best mortgage benefit available — no other loan program offers 0% down with no mortgage insurance and competitive interest rates. Create a budget that accounts for homeownership costs →

USDA Loans

USDA loans are available for properties in designated rural and suburban areas. They offer 0% down payment with income limits (typically 115% of the area median income). USDA loans have a guarantee fee (1% upfront + 0.35% annual) which is lower than FHA mortgage insurance. Credit scores of 640+ are preferred. Eligible properties must be owner-occupied primary residences in USDA-eligible areas. Approximately 97% of US land mass is USDA-eligible, but only about 30% of the population lives in these areas. USDA loans are an excellent option for buyers in qualifying areas who have limited savings but stable income.

Key Factors That Determine Your Mortgage Rate

Credit score is the most important factor. A score of 760+ qualifies you for the best rates. Each 20-point drop below 760 increases your rate by approximately 0.125% to 0.25%. Down payment also matters — 20%+ down gets the best rates and avoids PMI. Debt-to-income ratio (DTI) should be below 36% for best rates, though some loans allow up to 50%. Loan size affects rates — conforming loans have better rates than jumbo loans. Mortgage points allow you to buy down the rate — one point (1% of loan amount) typically reduces the rate by 0.25%. On a $400,000 loan, paying $4,000 for one point reduces your rate from 6.5% to 6.25%, saving $63/month. The breakeven is 63 months — worth it if you plan to stay that long. Improve your DTI by managing existing debt →

How much down payment do I need?

The traditional 20% down payment is not required for most loan types. Conventional loans allow as little as 3% down (3% conventional, FHA 3.5%, VA and USDA 0%). However, putting less than 20% down means paying mortgage insurance. On a $300,000 loan with 5% down ($15,000), PMI costs approximately $100 to $200 per month. The minimum down payment depends on your loan type and credit score. FHA requires 3.5% down with 580+ credit. Conventional requires 3% with 620+ credit. VA and USDA require 0% but have eligibility requirements. A larger down payment means a lower monthly payment, lower rate, and no PMI, but it also means tying up more cash that could be invested elsewhere. Many financial experts recommend putting down 10% to 20% if you can afford it, but 3% to 5% is fine for first-time buyers in most markets.

Should I get a 15-year or 30-year mortgage?

The answer depends on your cash flow and financial goals. A 15-year mortgage builds equity faster, saves massive interest, and forces disciplined saving. However, the higher monthly payment can strain your budget and leave less room for retirement investing, emergency savings, and other goals. A 30-year mortgage offers lower payments and more flexibility. The mathematically optimal strategy for most people is to take the 30-year mortgage and invest the difference between the 15-year and 30-year payment in a diversified stock portfolio. Over 30 years, a stock portfolio earning 7% to 10% is likely to outperform the guaranteed savings from paying off a 5% to 7% mortgage early. However, the 15-year provides a guaranteed return (the interest saved) and the psychological benefit of owning your home debt-free sooner. There is no wrong answer — the best choice is the one you can stick with consistently.

What credit score do I need for a mortgage?

Minimum credit scores vary by loan type. Conventional loans: 620 minimum, but 740+ for best rates. FHA loans: 500 with 10% down, 580 with 3.5% down. VA loans: no official minimum but most lenders require 620+. USDA loans: 640 preferred. Jumbo loans: typically 700+ with 10-20% down. A 760 credit score qualifies you for the lowest rates across all loan types. The difference between a 660 score and 760 score on a $400,000 30-year mortgage is approximately 0.75% to 1% in rate — worth $170 to $240 per month and $60,000 to $86,000 over the life of the loan. If your credit score is below 700, spend 6 to 12 months improving it before applying. Pay down credit card balances, fix any errors on your credit report, and avoid new credit applications for at least 6 months before your mortgage application. Build an emergency fund before buying a home →

Should I pay mortgage points?

Mortgage points (discount points) are prepaid interest. One point costs 1% of the loan amount and typically reduces the rate by 0.25%. On a $400,000 loan, one point costs $4,000 and might reduce the rate from 6.5% to 6.25%. The monthly savings is approximately $63. The breakeven period is 4,000 / 63 = 63 months (5.25 years). If you plan to stay in the home longer than the breakeven period, points are worthwhile. If you plan to move or refinance before the breakeven, skip points. Points are also tax deductible as mortgage interest over the life of the loan. Some lenders offer no-point loans with higher rates but lower closing costs. Compare the total cost of each option, not just the rate. A general rule: buy points if you plan to stay 7+ years, skip points if you plan to stay less than 5 years. Between 5-7 years, do the math for your specific numbers.

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