Understanding Mortgage Types: Fixed vs ARM vs FHA
Choosing the right mortgage is one of the most important financial decisions you'll make. With multiple loan types available—each with different requirements, costs, and benefits—understanding your options is crucial for finding the best fit for your situation. This comprehensive guide breaks down the most common mortgage types to help you make an informed decision.
Quick Comparison: All Mortgage Types
| Mortgage Type | Min. Down Payment | Credit Score | Best For |
|---|---|---|---|
| Conventional Fixed | 3-20% | 620+ | Strong credit, stable income |
| FHA | 3.5% | 580+ | Lower credit, first-time buyers |
| VA | 0% | No minimum | Veterans, active military |
| USDA | 0% | 640+ | Rural areas, moderate income |
| Adjustable-Rate (ARM) | 5-20% | 620+ | Short-term ownership, rate risk tolerance |
| Jumbo | 10-20% | 700+ | High-value homes, excellent credit |
Conventional Fixed-Rate Mortgages
The most common mortgage type, conventional fixed-rate loans offer predictable payments and are not backed by the government. Interest rates and monthly payments remain constant for the entire loan term.
15-Year vs. 30-Year Fixed
| Feature | 30-Year Fixed | 15-Year Fixed |
|---|---|---|
| Typical Rate | 6.5-7.0% | 5.8-6.3% |
| Monthly Payment | Lower | Higher (50-60% more) |
| Total Interest Paid | Much higher | Much lower (60% less) |
| Equity Building | Slower | Faster |
| Flexibility | More budget room | Less budget flexibility |
Example: $350,000 Loan
30-Year at 6.75%:
- Monthly payment: $2,270
- Total interest: $467,200
- Total paid: $817,200
15-Year at 6.00%:
- Monthly payment: $2,953
- Total interest: $181,540
- Total paid: $531,540
Savings with 15-year: $285,660 in interest
Pros of Fixed-Rate
- Predictable payments for entire loan term
- Protection from rising interest rates
- Easier to budget long-term
- No surprises or payment adjustments
- 15-year builds equity faster, saves interest
Cons of Fixed-Rate
- Higher initial rates than ARMs
- No benefit if rates drop (must refinance)
- 15-year has higher monthly payments
- 30-year pays significantly more interest
- Requires refinancing to change terms
Best For:
- Buyers planning to stay in home 7+ years
- Those who value payment predictability
- People concerned about rising interest rates
- 15-year: High earners who can afford higher payments and want to save on interest
- 30-year: Those who need lower monthly payments or want to invest the difference
FHA Loans (Federal Housing Administration)
Government-backed loans designed for first-time buyers and those with lower credit scores or limited down payment funds. FHA insures the loan, allowing lenders to offer more flexible terms.
FHA Loan Requirements
- Minimum down payment: 3.5% with 580+ credit score; 10% with 500-579 score
- Credit score: 580 minimum (500 with 10% down)
- Debt-to-income ratio: Up to 43% (sometimes 50% with compensating factors)
- Mortgage insurance: Required regardless of down payment
- Loan limits: Vary by county, typically $498,257-$1,149,825 (2025)
- Property requirements: Must be primary residence and meet FHA standards
FHA Mortgage Insurance (MIP)
Upfront MIP: 1.75% of loan amount (can be rolled into loan)
Annual MIP: 0.45-1.05% of loan amount, paid monthly
Duration:
- Down payment under 10%: MIP for life of loan
- Down payment 10%+: MIP for 11 years
Example on $350,000 loan:
- Upfront MIP: $6,125
- Annual MIP: ~$2,450/year ($204/month)
Pros of FHA
- Low down payment (3.5%)
- Lower credit score requirements
- More lenient debt-to-income ratios
- Easier to qualify after bankruptcy/foreclosure
- Seller can pay closing costs
- Assumable by future buyers
Cons of FHA
- Mortgage insurance required for life (under 10% down)
- Upfront and annual MIP costs add up
- Loan limits may not cover expensive areas
- Property must meet FHA standards
- More expensive long-term than conventional
- Cannot be used for investment properties
Best For:
- First-time homebuyers with limited savings
- Buyers with credit scores 580-680
- Those who can't afford 20% down payment
- People with higher debt-to-income ratios
- Recent bankruptcy or foreclosure (2-3 years vs. 7 for conventional)
VA Loans (Veterans Affairs)
Exclusive benefit for military service members, veterans, and eligible spouses. VA loans offer the best terms available with no down payment and no mortgage insurance.
VA Loan Benefits
- No down payment required
- No mortgage insurance (PMI/MIP)
- Competitive interest rates (typically 0.25-0.5% lower than conventional)
- No prepayment penalties
- Lenient credit requirements (no official minimum, lenders typically want 620+)
- Limited closing costs (seller can pay all closing costs)
- Assumable loans (buyer can take over your loan)
VA Funding Fee
One-time fee that replaces mortgage insurance:
- First-time use, 0% down: 2.15% of loan amount
- First-time use, 5%+ down: 1.5% of loan amount
- First-time use, 10%+ down: 1.25% of loan amount
- Subsequent use: 3.3% of loan amount
- Disabled veterans: Exempt from funding fee
Can be rolled into the loan amount. Example: $350,000 loan = $7,525 funding fee
Pros of VA
- Zero down payment option
- No monthly mortgage insurance
- Lower interest rates
- Lenient credit requirements
- No loan limits for full entitlement
- Can be used multiple times
- Seller can pay all closing costs
Cons of VA
- Funding fee (unless disabled)
- Only for primary residence
- Property must meet VA standards
- Limited to eligible veterans/service members
- Some sellers prefer conventional buyers
- Appraisals can be stricter
Best For:
- Veterans, active-duty military, National Guard, Reserves
- Eligible surviving spouses
- Anyone who qualifies—it's almost always the best option for eligible buyers
- Buyers with limited down payment funds
- Those who want to avoid mortgage insurance
Adjustable-Rate Mortgages (ARMs)
ARMs offer lower initial interest rates that adjust periodically based on market conditions. Common structures include 5/1, 7/1, and 10/1 ARMs (fixed for 5, 7, or 10 years, then adjusts annually).
How ARMs Work
Example: 7/1 ARM
- Initial period: Fixed rate for 7 years (typically 0.5-1% lower than 30-year fixed)
- Adjustment period: Rate adjusts annually after year 7
- Index: Based on SOFR, Treasury, or other benchmark
- Margin: Lender adds 2-3% to index rate
- Caps: Limits on how much rate can change
Rate Caps Example
Initial rate: 6.0%
Caps: 2/2/5
- First adjustment cap: 2% (max 8% at year 8)
- Subsequent adjustment cap: 2% per year
- Lifetime cap: 5% above initial rate (max 11%)
Worst case scenario: Payment could increase 50-80% over life of loan
Pros of ARMs
- Lower initial interest rate
- Lower initial monthly payments
- Can save money if you sell/refinance before adjustment
- Benefit if rates drop (no refinance needed)
- Qualify for larger loan amount
Cons of ARMs
- Payment uncertainty after fixed period
- Risk of significantly higher payments
- Difficult to budget long-term
- May not be able to refinance if rates rise
- Complex terms and calculations
- Stress of potential payment increases
ARM Risk Assessment
Ask yourself:
- Will I definitely sell or refinance before the adjustment period?
- Can I afford the maximum possible payment under worst-case caps?
- Am I comfortable with payment uncertainty?
- Do I have stable income that could handle payment increases?
If you answered "no" to any of these, choose a fixed-rate mortgage instead.
Best For:
- Buyers planning to sell within 5-7 years
- Those expecting income to increase significantly
- People comfortable with payment uncertainty
- Buyers who can afford worst-case payment scenarios
- Those who will definitely refinance before adjustment
Jumbo Loans
Loans that exceed conforming loan limits set by Fannie Mae and Freddie Mac. In 2025, the conforming limit is $806,500 in most areas ($1,209,750 in high-cost areas). Jumbo loans require stronger financial profiles.
Jumbo Loan Requirements
- Credit score: 700+ minimum, 740+ for best rates
- Down payment: 10-20% (20% avoids PMI)
- Debt-to-income: 43% maximum (36% preferred)
- Cash reserves: 6-12 months of payments required
- Documentation: Extensive income and asset verification
- Interest rates: Often 0.25-0.5% higher than conforming loans
Pros of Jumbo
- Finance high-value properties
- Competitive rates for qualified buyers
- Same tax deductions as other mortgages
- Can be fixed or adjustable rate
Cons of Jumbo
- Stricter qualification requirements
- Higher interest rates
- Larger down payment needed
- More extensive documentation
- Higher closing costs
- Significant cash reserves required
Choosing the Right Mortgage
Decision Framework
Choose Conventional Fixed if:
- Credit score 680+
- Can afford 5-20% down payment
- Want predictable payments
- Planning to stay 7+ years
Choose FHA if:
- Credit score 580-680
- Limited down payment (3.5%)
- Higher debt-to-income ratio
- First-time buyer
Choose VA if:
- You're eligible (veteran, active military)
- Almost always the best option for qualified buyers
Choose ARM if:
- Definitely selling within 5-7 years
- Can afford worst-case payments
- Comfortable with risk
Choose Jumbo if:
- Home price exceeds conforming limits
- Excellent credit (740+)
- Significant assets and income
Key Takeaways
Remember
- Fixed-rate mortgages offer payment stability and protection from rising rates
- FHA loans help buyers with lower credit scores and limited down payments
- VA loans are almost always the best option for eligible veterans
- ARMs can save money short-term but carry significant long-term risk
- Jumbo loans require excellent credit and substantial financial resources
- Consider how long you'll stay in the home when choosing loan type
- Get pre-approved with multiple lenders to compare rates and terms
- Factor in all costs: interest, insurance, taxes, and fees
The right mortgage depends on your financial situation, goals, and how long you plan to stay in the home. Take time to compare options, understand the true costs, and choose the loan that best fits your needs and risk tolerance.