Which Mortgage Is Right For Me? Look Beyond the 30-Year Fixed If You Dare

which mortgage

An age old question: “Which mortgage is right for me?”

When shopping for a home loan, whether it’s a new purchase-money mortgage or a refinance, knowing which loan type to pick and why is absolutely paramount.

After all, the choice you make today will affect your checkbook for years to come. Possibly even 30. So it’s important to put some thought behind your decision.

Yes, it will involve a mortgage calculator, research, note taking, and not least of which, your precious time.

We’re not shopping for a microwave here folks. We’re talking about one the bigger financial decisions of your life.

Lots of Mortgage Options: There are countless mortgage types to choose from — conventional, conforming, FHA, VA, USDA, jumbo, fixed-rate (FRM), adjustable-rate (ARM), and more. The “right mortgage” depends on individual financial circumstances and goals. Or even what you qualify for.

It’s a Personal Choice: No one-size-fits-all mortgage exists. An FHA loan might be suitable for a low-credit score home buyer, while VA loans benefits military/veterans, USDA loans are great for rural areas, and ARMs appeal to wealthy home buyers (or those looking to refi/sell soon thereafter).

Key Factors to Consider: Choosing the right mortgage involves assessing your credit scores, down payment, income, debt-to-income (DTI) ratio, property type, and how long you plan to stay in the home (and with the loan).

The Decision Might Be Made for You: For example, if your FICO score is below 620, you might have no choice but to go with an FHA loan. Same with a 30-year fixed vs. 15-year fixed if your DTI only allows the former.

Pre-Approval Is Key: Getting pre-approved by a mortgage lender early on, even before shopping for a home, could help you narrow down your loan choices (and strengthen your offer), by tailoring the appropriate mortgage type to your unique financial profile.

Rate Shopping Will Be Easier: Once you narrow it down, it’ll be easier to shop around for a great mortgage rate (they vary by lender!) So once you decide on the right mortgage for you, be sure to get multiple quotes from lenders/banks, credit unions, and brokers and compare offers!

Two Main Mortgage Categories – Fixed & Adjustable

30-Year Fixed Mortgage: 6.75% (rate never changes)
5/1 ARM: 6.25% (rate can go up after five years)

You basically have one major choice to make: fixed or adjustable?
Go with a fixed-rate mortgage and never worry about your interest rate increasing
Or choose a cheaper ARM today and risk a major payment jump in the future
Either way you still need to keep an eye on interest rates over time

When selecting an appropriate mortgage, it generally comes down to two main choices. Fixed or adjustable. A timeless mortgage question to be sure.

Do you go with the relative safety of a 15- or 30-year fixed-rate mortgage, or do you try your luck with an adjustable-rate mortgage?

The answer depends on your unique financial position, how long you plan to hold the property, the general state of the economy, and your own individual risk appetite.

If you’re the type who likes to play it safe, a fixed-rate mortgage is probably the best choice, hands down.

With a FRM, you won’t have to worry about the interest rate changing at all throughout the life of the loan, which means you won’t ever see your monthly mortgage payment increase.

[Searching for a home loan? See your options with dozens of lenders fast.]

This is certainly great peace of mind, but you do pay a bit of a price for it. Nothing is free.

Currently, mortgage rates on 30-year fixed loans are hovering around 6.75%, while 5/1 ARMs are pricing about a half point to a full percentage point lower.

Jump to mortgage choice topics:

– There Isn’t One Right Mortgage
– If You Don’t Like Risk…Think Fixed
– If Open to Some Risk or Plan a Short Stay, an ARM Might Work
– If You Want to Own More of Your Home Sooner
– If You Want to Pay Off Your Mortgage Slowly
– If You Want the Lowest Rate on Your Mortgage
– If You Want to Tap Equity

ARMs Come In Many Varieties, Some Lower Risk Than Others

That brings us to adjustable-rate mortgages. These days, most ARMs are in fact hybrid ARMs, meaning they’re fixed for a certain period of time before becoming adjustable.

So you actually get some built-in peace of mind, at least for the first few years.

One of the most popular ARMs is the 5/1 ARM, which is fixed for the first five years of the loan term, and adjustable for the remaining 25 years.

This means you get 60 months of absolute certainty, followed by 25 years of the great unknown.

Of course, you get a “discount” for taking on that risk in the form of a lower mortgage rate. However, the big question is whether it’s worth it. Again, this depends on a number of factors.

How long will you keep the loan? Will rates be cheaper in the future, allowing for a rate and term refinance?

If you’re not quite convinced an ARM is for you, take a look at longer-term ARMs, such as the 7/1 and 10/1 ARM.

These are fixed for seven and 10 years, respectively, before adjusting annually. This is one way to get the best of both worlds.

There Are Different Fixed-Rate Mortgages for Different Situations

While there are several different ARMs to choose from, there are also various fixed-rate mortgages at your disposal as well.

Since the interest rate is, well, fixed on all FRMs, the key differentiator will be the loan term.

Basically how long do you want your home loan to last? Do you want to pay it off ASAP? Or do you want to take your time?

The answer could vary if you’re close to retirement, or just getting started on your adult journey.

Recently, many home buyers and existing homeowners took advantage of the record low mortgage rates on offer.

Now tens of millions have a fixed interest rate ranging from 1-4%, with no intention of paying it off anytime soon.

The logic is they can earn a higher rate of return elsewhere, whether it’s in the stock market or simply a high-yield savings account.

But there are still those who want the mortgage gone as quickly as possible. If that’s you, the shortest term might be the best, especially if you get a lower mortgage rate as a result.

Just be mindful of the steep payment increase. With a longer mortgage term, you still have the optionality to make extra payments whenever you wish.

So you could take out a 30-year loan but pay it back like it’s a 15-year loan. The opposite isn’t possible.

There Isn’t One Right Mortgage for Everyone

There isn’t one perfect mortgage out there that fits everyone’s needs
Product choice will vary tremendously based on personal preference
Along with what you can afford, what you plan to do with the property, and so on
It’s important to consider all the options available to make the right decision

If you’ve read what I’ve written so far, you should realize there’s no perfect, one-size-fits-all mortgage.

We have to consider personal risk appetite, tenure (how long you’ll keep the property), mortgage payoff goals, ability to refinance in the future, current interest rate environment, and more.

Simply put, a wealthier homeowner has more options, whereas someone who earns less may only be able to afford the 30-year fixed. And also won’t be able to take chances with an ARM. End of story.

A 15-year fixed could be the best choice if you’re a conservative borrower with deeper pockets, especially if you want to pay off your mortgage early.

The monthly payment will be significantly higher because of the shorter term, but you’ll pay a lot less in interest and own your home free and clear a lot sooner.

[30-year fixed vs. 15-year fixed]

If that’s what you’re looking for, it’s possible to take things a step further and make it a 10-year fixed too.

There’s even a 15/15 ARM now, which is fixed for 15 years before adjusting just once at the halfway point. That could satisfy even the biggest ARM-hater.

For the record, most homeowners move within six years, so many of these ARMs wouldn’t even make it to the first adjustment period before being paid off via a sale.

But others might have their eyes on a forever home, with no intention of ever leaving or applying for another mortgage.

So two individuals could wind up with a very different “right mortgage” depending on the circumstances.

If You Don’t Like Risk…Stick with Fixed

Best for risk-averse individuals
Don’t want to stay up at night worrying about higher payments
Can’t handle a larger monthly payment if your rate adjusts higher
Might not qualify for a refinance in the future (uncertain financial situation)
Plan to stay in your home for the long-haul and pay off your mortgage
Also a great choice if fixed mortgage rates are super low (as they were from 2012-2022)

If You’re Open to Risk or Plan a Short Stay, an ARM Could Work

Don’t plan on staying in your home for a long time (may relocate or upgrade)
Want a lower payment for the first 3-7 years of your loan term
Think mortgage rates will hold steady or drop in the future, allowing you to refinance
Don’t want to pay off your mortgage because you think you can do better investing elsewhere
Are an investor who only plans to keep the property for a year or two before flipping

If You Want to Own More of Your Home Sooner

Choose either a 15-year fixed or a cheaper adjustable-rate mortgage
A greater amount of the payment will go toward the principal balance each month
Allows you to build equity quicker and pay off your loan faster
Just be aware that shorter-term mortgages can be expensive and ARMs may adjust higher

If You Want to Pay Off Your Mortgage Slowly

Go with a 30-year fixed if rates are attractive
Or a cheaper ARM if rates are high and expected to fall
Will keep monthly payments lower but result in more interest paid
Allows you to put more of your money to use elsewhere
Can refinance if and when necessary assuming rates improve

If You Want the Lowest Rate on Your Mortgage

The lowest interest rate will generally be on a short-term ARM
Such as a 3/1 ARM, 5/1 ARM, or even the 7/1 ARM
Those who can afford it may also consider the 15-year fixed or 10-year fixed
But the monthly payment will be a lot higher if the loan term is short

If You Want to Tap Equity

A cash-out refinance works if current mortgage rates are lower than your existing rate
If rates are higher you can tack on a second mortgage such as a HELOC or home equity loan
This will leave the interest rate and loan term on your existing loan intact
Seniors have the added option of a reverse mortgage but be vary of the costs involved

So there you have it – a primer on what mortgage you should pick and why.

Remember, this is a huge financial decision and should go well beyond reading one article. Read several.

Sit down and compare all available options. Do the math. Do your homework. Make a plan. And SHOP AROUND!

Getting more than one quote is a surefire way to save regardless of the loan type you choose.

5 thoughts on “Which Mortgage Is Right For Me? Look Beyond the 30-Year Fixed If You Dare”

Diane Walter June 29, 2012 at 3:44 pm
There is some great reading and information on this website.
I am in a rock and hardplace. A possibility of a 5/1 ARM with $1,000+appraisal costs @ 2.875 OR 7/1 ARM with no costs @ 3.125.
No I do not plan to stay for 30 years. I am planning to move in a year or so. I have already been here 26 years and have refied a few times along the way. Wait until you have to buy out the spouse – everything starts all over – loan wise.
JackO September 8, 2013 at 10:40 am
I considered myself a 30-year fixed type of person, but now that rates have risen so much, I might become a 7-year ARM person. I guess it’s my alter ego. LOL.
Millard February 20, 2014 at 9:18 pm
I’m a 15-year fixed person, but I also live in a state where home prices aren’t grossly inflated. For most people, a 30-year fixed is the only thing they can afford. Or worse, an ARM they can afford today but not tomorrow.
Frances February 21, 2014 at 4:36 am
It’s simple. If you are risk-averse and plan to stay in your home for a while, go fixed. If you are the opposite, go ARM. Done.
Colin Robertson February 21, 2014 at 4:21 pm
That’s a good way of summing it up Frances, but each situation is unique and needs time and careful thought before making a decision. It also depends on rate spreads between different products at the time you take out the mortgage.