Fixed-rate vs. adjustable-rate (ARM)
The standard US mortgage is a 30-year fixed-rate loan. The rate and the principal-and-interest payment stay the same for the life of the loan, so your payment is predictable. The equivalent of Korea’s variable or hybrid loans is the adjustable-rate mortgage (ARM).
ARMs are written like “5/6 ARM”: the rate is fixed for five years, then resets every six months to an index (usually SOFR) plus a margin. Caps limit the first adjustment, later adjustments and the lifetime increase (for example 2/1/5), so before signing, check what your payment would be in the worst case. You get a lower starting rate than a fixed loan in exchange for taking on the risk that rates rise.
Most US fixed-rate mortgages have no prepayment penalty, or a tightly limited one (on a qualified mortgage, only in the first three years and at most 2%), so refinancing when rates fall is common.
15 vs. 30 years: payments and total interest (example)
Here is a $300,000 loan at example rates of 6.0% for 30 years and 5.5% for 15 years (15-year loans usually carry a slightly lower rate). Actual rates depend on the market and your credit score.
On the 30-year loan, 83% of the first payment is interest. After 10 years of payments, you have paid off only about 16% of the principal ($48,943). The 15-year loan costs about $650 more per month but saves more than $200,000 in interest.
Monthly payment M = P × r ÷ (1 − (1 + r)^−n) P: loan amount, r: annual rate ÷ 12, n: number of monthly payments Example: 300,000 × 0.005 ÷ (1 − 1.005^−360) = $1,798.65
| Item | 30-year fixed at 6.0% | 15-year fixed at 5.5% |
|---|---|---|
| Monthly principal and interest | $1,798.65 | $2,451.25 |
| First payment: interest / principal | $1,500.00 / $298.65 | $1,375.00 / $1,076.25 |
| Balance after 5 years | $279,163 | $225,867 |
| Balance after 10 years | $251,057 | $128,330 |
| Total interest | $347,515 | $141,225 |
Example calculation for a fully amortizing loan. Property tax, insurance and PMI are not included.
Interest rate, APR and points
Within three business days of applying, you receive a standardized Loan Estimate, and at least three business days before closing, a Closing Disclosure. Because every lender uses the same forms, you can line up offers side by side, and the CFPB recommends getting quotes from several lenders.
- Interest rate: The rate charged on the principal; it sets your monthly principal-and-interest payment.
- APR (annual percentage rate): The interest rate plus lender fees such as the origination fee, points and some insurance, expressed as a yearly rate. It is the standard way to compare loans, though your true cost will differ from the APR if you pay off or refinance early.
- Discount points: One point equals 1% of the loan amount paid upfront to lower the rate. How much the rate drops varies by lender. Points pay off only if you keep the loan longer than the break-even period: upfront cost ÷ monthly savings.
What’s in the monthly payment: PITI, escrow and PMI
A US mortgage payment is often called PITI: principal, interest, (property) taxes and insurance.
- Escrow: Your lender collects a monthly share of your property tax and homeowners insurance, holds it in an escrow account and pays the bills for you. Each year it reruns the numbers with the actual tax and premium: a shortage raises your payment and a surplus is refunded. That is why your payment can change even on a fixed-rate loan when property taxes go up.
- PMI (private mortgage insurance): Required on a conventional loan when your down payment is less than 20% of the price. It protects the lender, but you pay for it. You can ask in writing to cancel it once your balance falls to 80% of the original value, including through extra payments (conditions such as a good payment history and no decline in the home’s value apply), and it ends automatically on the date your balance is scheduled to reach 78% under the original payment schedule, as long as you are current.
- HOA dues: Condos, townhouses and planned communities charge homeowners association dues. They are not part of the mortgage payment, but lenders count them in your debt ratio.
Loan types and approval: credit score and DTI
Your credit score (FICO, 300–850) has a big effect on your rate, and higher scores get better pricing. For conventional loans, 620 was long the minimum; Fannie Mae dropped that floor for loans run through its Desktop Underwriter (DU) system in November 2025, but lenders may still set their own minimum scores. Newcomers to the US may have no credit history and therefore no score.
Debt-to-income ratio (DTI) is your monthly debt payments divided by your gross monthly income. The familiar 28/36 rule of thumb says housing costs (PITI) should stay within 28% of gross income and all debt payments within 36%. Actual lender limits can be higher depending on the loan type (often up to 45–50% for conventional loans).
DTI = total monthly debt payments ÷ gross monthly income Example: $8,000 gross monthly income, PITI $2,240 + car payment $400 Housing ratio = 2,240 ÷ 8,000 = 28%, total DTI = 2,640 ÷ 8,000 = 33%
| Type | Minimum down payment (approx.) | Key points |
|---|---|---|
| Conventional (conforming) | 3–5% | Follows Fannie Mae/Freddie Mac rules. 2026 conforming limit for one unit: $832,750 (up to $1,249,125 in high-cost areas). PMI if under 20% down |
| Jumbo | Usually 10–20% | Above the conforming limit; stricter underwriting |
| FHA | 3.5% (credit score 580+) | Insured by the Federal Housing Administration. Easier credit, but an upfront premium of 1.75% plus annual mortgage insurance (MIP) |
| VA | 0% | For service members and veterans. No PMI; a funding fee instead |
| USDA | 0% | Eligible rural and some suburban areas; income limits apply |
Extra payments and refinancing
Paying extra toward principal cuts your interest substantially. In the $300,000, 30-year, 6.0% example, an extra $200 a month pays off the loan in about 23 years and 3 months and saves roughly $91,000 in interest (example calculation). When you pay extra, specify that it should be applied to principal so it is not treated as an early payment of next month’s bill.
Refinancing means taking out a new loan to pay off the old one. You pay closing costs again (often 2–5% of the loan), so consider whether you will stay in the home longer than the break-even period. Restarting a 30-year term can lower your payment while increasing the total interest you pay.
Some lenders also offer a recast: you pay down a lump sum and they recalculate the payment for the remaining term without a new loan, typically for a fee of a few hundred dollars.
Break-even (months) = refinancing costs ÷ monthly payment savings Example: 6,000 ÷ 200 = 30 months
FAQ
Is mortgage interest tax-deductible?
If you itemize, you can deduct interest on up to $750,000 of mortgage debt ($1 million for loans taken out before December 16, 2017) on up to two homes. Starting in 2026, PMI premiums are deductible again as mortgage interest, subject to income limits. Because the standard deduction is large, relatively few households actually itemize.
Do biweekly payments help?
Paying half your monthly payment every two weeks means 26 half-payments, or 13 full payments, a year, which works like an extra principal payment. Adding one-twelfth to each monthly payment has the same effect, and some biweekly services charge a fee, so check first.
Can non-citizens get a mortgage?
Permanent residents can borrow on nearly the same terms as citizens, and many work-visa holders qualify if they have US income and credit history. Without a credit history, you may need a larger down payment or pay a higher rate.
What if I can’t make my payments?
Contact your servicer before you fall behind to discuss forbearance or a loan modification, and get free advice from a HUD-approved housing counselor. Under federal rules, a servicer generally cannot start foreclosure until you are more than 120 days delinquent.