Chapter 6: The mortgage menu
Two buyers borrow the same $400,000 in the same month. One signs up to pay about $515,000 in interest over the life of the loan; the other about $204,000. Same house price, same lender, a difference of more than $311,000, all from which product they picked off the menu. Chapter 5 covered who qualifies for the low-down programs; this chapter covers how every major loan actually works, and the one formula that explains them all.
The menu, in plain English
Conventional conforming, 30-year fixed
A loan that meets Fannie Mae and Freddie Mac's rules, including the 2026 size limit: $832,750 for a one-unit home, rising to $1,249,125 in high-cost counties. Fixed rate, fixed payment for 30 years, down payments from 3% (Chapter 4), PMI below 20% down that you can cancel. Roughly speaking, everything else on the menu is a variation on this loan, and it is the right default for most buyers with solid credit.
Jumbo
Any loan above the conforming limit for your county. Because Fannie and Freddie cannot buy these, the lender carries more risk and underwrites accordingly: larger down payments, more months of reserves in the bank, tighter debt-to-income standards, and full documentation. Rates are sometimes close to conforming rates, but approval is harder to get. This is Maya's territory: in her market, a 20% down payment on the houses she tours still leaves a loan above $832,750.
FHA
Government-backed, 3.5% down, built for buyers with thinner credit files. The mechanics to understand: an upfront mortgage insurance premium of 1.75% of the loan (usually rolled into the balance) plus an annual premium of 0.55%, and with less than 10% down that annual charge lasts the life of the loan. No cancellation at 20% equity like PMI; the exit is refinancing into a conventional loan (Chapter 13). 2026 limits run from $541,287 up to $1,249,125 by county.
VA
For veterans, active-duty service members, and certain surviving spouses: 0% down, no monthly mortgage insurance at all, and competitive rates. The cost sits at closing instead: a funding fee between 0.5% and 3.3% of the loan, 2.15% for a first use with nothing down, waived for veterans with service-connected disabilities. The fee can be financed into the loan. For those who qualify, this is usually the cheapest structure on the menu.
USDA
0% down for homes in USDA-eligible areas, with household income caps. The maps reach further into the suburbs than the word "rural" suggests, so the mechanics are simple: check the address, check your income, and compare the all-in monthly cost (USDA charges its own guarantee fee) against an FHA or conventional quote on the same house.
ARMs: 5/6 and 7/6
An adjustable-rate mortgage (ARM) starts with a fixed rate for 5 or 7 years, then adjusts every 6 months based on market rates. Three caps limit the damage: one on the first adjustment, one on each later adjustment, and a lifetime cap on how high the rate can ever go. The 2008 versions deserved their reputation; today's are regulated differently, and lenders must verify you can afford more than the starting payment. An ARM is rational only when two things are both true: you are confident you will sell or refinance inside the fixed window, and you could still afford the payment at the lifetime cap if you are wrong. Price the worst case before admiring the start rate.
The one formula in this guide
Every fixed loan above runs on the same arithmetic. This is the only formula in the entire guide, and it is worth one slow look:
M = P \times \frac{r(1+r)^{n}}{(1+r)^{n}-1}
In plain English: M is the monthly payment for principal and interest. P is the principal, the amount you borrow. r is the monthly interest rate, which is the annual rate divided by 12, so 6.55% becomes 0.0655 ÷ 12, about 0.00546. And n is the total number of monthly payments: 360 for a 30-year loan, 180 for a 15-year. The formula finds the one fixed payment that pays the interest due each month and retires the whole balance exactly at payment number n. Taxes, insurance, and PMI ride on top of M (Chapter 3's payment stack).
Run Jamie's numbers through it: a $400,000 home with 10% down means P is $360,000, r is 0.00546, and n is 360. The payment comes out to $2,287 a month.
The formula's quiet consequence matters more than the formula. In month one, the interest due is $360,000 × 0.0655 ÷ 12, which is $1,965. Only the leftover $322 reduces the balance. Out of Jamie's first $2,287 payment, 86 cents of every dollar is interest. Ten years in, after paying about $274,500, the balance has only fallen to about $305,600: just $54,400 of principal retired. The interest and principal halves of the payment do not reach 50/50 until month 234, around year 19 and a half. This slow start is called amortization, and it is why extra principal early in the loan punches so far above its weight: an extra $200 sent in year one avoids 6.55% compounding for three decades, wiping out roughly $1,400 of payments from the far end of the loan.
15 years versus 30
The term you pick changes two numbers at once: the payment and the rate, because 15-year loans typically price about half a percentage point cheaper. Using 6.55% for the 30-year and 5.90% for a 15-year, on a $400,000 loan:
360 payments totaling about $914,900, of which about $514,900 is interest. The loan costs more than the house did.
180 payments totaling about $603,700, of which about $203,700 is interest. $812 more per month buys back about $311,200.
That comparison looks like a landslide, and on pure interest it is. The honest counterargument is flexibility. A 30-year loan with voluntary extra principal payments can finish nearly as fast as a 15-year, and in a bad year you can drop back to the smaller required payment. The 15-year offers no such retreat. What the 15-year buys that discipline cannot copy is the cheaper rate, roughly 0.65 percentage points here, plus the honesty of a commitment. The deciding test is the Chapter 3 budget: a 15-year only makes sense when the bigger payment still leaves your savings rate and reserves intact in your worst realistic month.
Default to the 30-year fixed conforming loan. Step up to a 15-year only when the higher payment passes your Chapter 3 budget with room to spare, and consider an ARM only if you could afford the payment at its lifetime cap.
Carlos and Elena are downsizing, with about $510,000 coming out of the sale of their family home and a $400,000 condo in their sights. Option one: pay cash, own the condo outright, and keep $110,000 liquid. Option two: put $240,000 down, take a $160,000 15-year loan at 5.90% (a $1,342 monthly payment), and keep $270,000 invested. Paying cash is the equivalent of earning a guaranteed 5.90% on that $160,000, and the invested alternative would have to beat that after taxes, with the sequence-of-returns risk the Personal Finance Guide, Chapter 23, warns retirees about. They choose cash for the zero payment and the quiet, and they keep the $110,000 as their reserve. The math would also have defended the small mortgage; what it would not defend is a payment that forces them to sell investments in a down market.
Where people go wrong
- Shopping by payment alone. An ARM's start rate or a 30-year's smaller payment can hide six figures of difference in total cost. Compare total interest and the worst case, then the payment.
- Treating FHA's annual MIP like PMI. PMI cancels at 20% equity; FHA's annual premium, with under 10% down, only ends when you refinance. Plan the exit on day one.
- Assuming jumbo is just "more loan." It is a different underwriting world: reserves, documentation, and down payment expectations all rise.
- Ignoring the early-years math. The first decade of a 30-year loan retires very little principal, which is why short ownership horizons favor renting (Chapter 2) and why early extra principal payments work so well (Chapter 13).
Key takeaways
- The 30-year fixed conforming loan is the menu's default; the 2026 conforming limit is $832,750, with a $1,249,125 ceiling in high-cost counties, and jumbo loans above that line carry stricter underwriting.
- One formula prices every fixed loan: the payment depends only on the amount borrowed, the monthly rate, and the number of payments.
- Amortization starts slow: on a $360,000 loan at 6.55%, 86% of the first payment is interest, and principal does not claim half the payment until month 234.
- On $400,000, a 15-year at 5.90% costs $3,354 a month against the 30-year's $2,541 at 6.55%, and saves about $311,200 of interest. Take it only if the payment fits your budget in a bad month.
- ARMs are a bet that you will move or refinance in time; size the bet by the lifetime cap, not the start rate.
Sources: FHFA: 2026 Conforming Loan Limits · HUD: 2026 FHA Loan Limits · VA: Funding Fee and Closing Costs · Bankrate: Current Mortgage Rates · CFPB: Buying a House