[next →] [← prev] [prev-tail] [tail] [up]

Home Loan Structures

Mortgage debt structure dictates interest-rate exposure, cash-flow certainty, and amortization velocity:

30-Year Fixed: This loan has a 30-year term with a fixed monthly payment and interest rate for the entire duration. Best for long-term stability and lower monthly payments. Ideal if you plan to stay in the home for a long time.
15-Year Fixed: Similar to the 30-year fixed loan but must be repaid within 15 years. The shorter term usually results in a slightly lower interest rate. Best for those who can afford higher payments and want to save on interest. Ideal for building equity quickly and reducing overall interest costs.
5/6 ARM (the old 5/1): A 30-year loan with a fixed rate for the first 5 years. After that the rate resets every six months off the 30-day average SOFR plus a fixed margin; the annual-reset 5/1 tied to LIBOR is a retired product, and every agency ARM plan is now SOFR-indexed. Adjustments are subject to caps quoted as initial/periodic/lifetime, such as “2/1/5”: the first reset can move up to 2%, each later reset up to 1%, and the rate can never exceed the start rate by more than 5%. Best for short-term homeowners, and only if you can carry the payment at the lifetime cap. Ideal if you plan to move or refinance before the first reset.

One option missing from that list deserves a hard look whenever prevailing rates sit well above where they were a few years ago: the assumable mortgage. FHA, VA, and USDA loans are assumable, meaning a qualified buyer can take over the seller’s existing note at the seller’s original rate. A seller carrying a 3% loan from 2021 is sitting on an asset separate from the house, and in a 6.5% market that spread is worth real money to whoever captures it — on a $500,000 balance it is roughly $1,000 a month. The obstacles are practical, not legal: you must qualify with the existing servicer, the process is slow, and you must fund the gap between the loan balance and the purchase price in cash or with an expensive second lien. Conventional loans are not assumable; the due-on-sale clause, federally protected by the Garn-St. Germain Depository Institutions Act of 1982 ( 12 U.S.C. §1701j-3), forecloses the idea. The mechanics are in section “Assumable Mortgage Loans”. Ask the listing agent whether the loan is assumable before you write an offer — most will not know, and the answer is occasionally worth more than any price concession you could negotiate.

Table 17.2 “Comparison of Mortgage Loans” compares these types.

Table 17.2: Comparison of Mortgage Loans

Mortgage Type	Pros	Cons
30-Year Fixed-Rate	Lower Monthly Payments: Spread over 30 years, making it easier to manage monthly cash flow.	Higher Total Interest: You pay more interest over the life of the loan compared to shorter terms.
	Predictability: Fixed interest rate ensures consistent payments, aiding in long-term budgeting.	Slower Equity Build-Up: Takes longer to build home equity, which can affect your net worth.
	Inflation Hedge: Payments remain the same even if inflation rises.
15-Year Fixed-Rate	Lower Total Interest: You pay significantly less interest over the life of the loan.	Higher Monthly Payments: Payments are higher, which can strain your monthly budget.
	Faster Equity Build-Up: Builds equity quicker, raising your net worth.	Less Flexibility: Higher payments reduce financial flexibility for other investments or expenses.
	Lower Interest Rates: Typically, these loans have lower interest rates than 30-year mortgages.
Adjustable-Rate Mortgages	Lower Initial Rates: Often start with lower rates than fixed-rate mortgages, reducing initial payments.	Rate Uncertainty: Rates can increase, leading to higher payments. See historical data \| www. freddiemac. com/ pmms.
	Potential Savings: If interest rates remain low, you could save money over the life of the loan.	Complexity: Understanding terms and caps can be confusing.
	Flexibility: Good for short-term homeowners who plan to sell before rates adjust.	Risk: Potential for significant payment increases, which can strain finances.
Interest-Only Mortgages	Lower initial payments, more cash flow flexibility.	No equity build-up during the interest-only period, higher payments later.
FHA Loans	Lower down payments, easier qualification.	Mortgage insurance premiums, potentially higher overall costs.

[next →] [← prev] [prev-tail] [front] [up]