Mortgage Loan Types Explained

Fixed-Rate Mortgages: How They Work

A fixed-rate mortgage is a home loan with an interest rate that remains constant for the entire loan term, so your monthly principal and interest payment stays the same. This predictability makes budgeting easier, though your total monthly payment can change if property taxes or homeowners insurance costs change.

Fixed-rate mortgages are generally best for borrowers who plan to stay in their home for the long term, often 10 years or more, because they lock in a rate for the length of the loan.

• Stable monthly principal and interest payment
• Rate remains unchanged for the life of the loan
• Popular for long-term homeownership plans

Sources: Freddie Mac, Fannie Mae, Consumer Financial Protection Bureau, New Story Lending, Bankrate

Adjustable-Rate Mortgages (ARMs): How They Work

An adjustable-rate mortgage (ARM) has an interest rate that is fixed for an initial period—typically 5, 7, or 10 years—and then adjusts periodically based on market rates. ARMs usually start with a lower initial interest rate than comparable fixed-rate mortgages, making initial monthly payments lower, but the rate and payment can increase after the fixed period ends.

Most ARMs include rate caps, which are limits on how much the interest rate can change at each adjustment and over the life of the loan. The first number in an ARM name (e.g., 5/6 ARM) indicates the number of years the initial rate is fixed, and the second number indicates how often the rate adjusts afterward—for example, every six months. Common ARM structures include 5/6 ARM (fixed for 5 years, adjusts every 6 months), 7/6 ARM, and 10/6 ARM.

ARMs are often more popular when long-term fixed rates are high, and they may be an option for borrowers who expect to stay in their home only a short time (e.g., five years or less).

• Lower initial interest rate than fixed mortgages
• Rate adjustments after the fixed period, with caps limiting changes
• Suitable for short-term homeownership or refinancing plans

Sources: Freddie Mac, Consumer Financial Protection Bureau, New Story Lending, Bankrate, Charles Schwab

Common Loan Terms: 30-Year and 15-Year

Fixed-rate loans typically come in terms of 15 or 30 years, and most borrowers choose 30-year loans. Shorter-term loans, such as a 15-year fixed, typically have lower interest rates but higher monthly payments, while longer-term loans, such as a 30-year fixed, have lower monthly payments but higher total interest costs over the life of the loan.

The table below summarizes typical differences between the two most common terms.

Sources: Consumer Financial Protection Bureau, Bankrate

Fixed and Adjustable Rates

Choosing between a fixed-rate and an adjustable-rate mortgage depends on your financial situation and how long you plan to stay in the home. Fixed rates provide stability and peace of mind, but typically start higher. ARMs offer lower initial payments, but carry the risk of future rate increases.

• Fixed-rate: stable payments, predictable, but higher initial rate
• ARM: lower initial payments, but payments can rise after the fixed period
• ARMs are often more attractive when fixed rates are high, especially for short-term owners

Sources: Freddie Mac, Consumer Financial Protection Bureau, Bankrate, Charles Schwab

How to Choose Between Loan Types

When deciding between a fixed-rate and an adjustable-rate mortgage, consider how long you plan to stay in the home. If you expect to stay for many years—often 10 years or more—a fixed-rate mortgage may be the better choice because it locks in a rate for the long term. If you expect to move or refinance within a few years, an ARM might offer lower initial payments and could save you money.

Also consider your tolerance for payment changes. Fixed-rate loans offer certainty, while ARMs can provide savings but with the possibility of higher payments later. Review the specific rate caps and adjustment schedule of any ARM you consider to understand your potential exposure.

• Long-term homeowners: fixed-rate often more suitable
• Short-term owners: ARM may be attractive for lower initial payments
• Always review ARM rate caps and adjustment frequency before committing

Sources: Freddie Mac, Consumer Financial Protection Bureau, Bankrate, Charles Schwab

Interest-Only and Other Specialty Loans

Beyond standard fixed and adjustable loans, there are specialty mortgages with unique features. Interest-only loans allow you to pay only the interest for a set period, usually five to seven years, after which your payments include principal and interest. Balloon mortgages require a lump-sum payment of the unpaid balance at the end of a specific period, typically five or seven years, and may include an option to reset the interest rate. Graduated payment mortgages are a type of fixed-rate mortgage where monthly payments start lower and increase gradually over time.

These specialty loans can be useful in specific situations but often carry higher risk, so they are not the right choice for most borrowers.

• Interest-only: lower initial payments, but larger payments later
• Balloon: lump-sum payment at maturity, often with reset option
• Graduated payment: payments increase gradually over time

Sources: Freddie Mac, Charles Schwab