Most people can't afford to pay for a home with cash. Rather, they must qualify for a mortgage, which is a home loan, typically from a financial institution. A mortgage is made of three components:

• Down Payment - This is the amount of cash you bring to the purchase. Typical down payments range between 3% and 20% of the home's price - the higher the down payment, the lower the mortgage. On many conventional loans, a down payment of 20% or more allows you to avoid private mortgage insurance (PMI), which can add a meaningful amount to your monthly payment. PMI costs vary based on loan size and other factors, so it's worth asking your lender how it would apply to your specific loan.

• Monthly Payment - Your monthly financial commitment. This payment includes both principal (the amount you owe), interest, and applicable fees.

• Closing Costs - The costs associated with taking out the mortgage. They include processing fees, title fees, local government fees, recording the deed, among others. These fees typically account for 1% to 3% of the price of the home. Some of these costs can be rolled into your mortgage, or you may be able to split them with the seller.

There are several types of mortgages, each of which offers some variation of a monthly payment versus total cost equation. Some mortgages are designed to be more affordable in early years, while getting more expensive later. Others offer a predictable monthly payment for the lifetime of the mortgage. 

Fixed-Rate Mortgage

One of the most popular types of mortgages is the fixed-rate mortgage. These are the most predictable mortgages since the interest rate and payment remain the same over the term of the loan. Terms are typically either 15 or 30 years. Longer terms offer a lower monthly payment, but a higher cost over the entire term of the loan. Shorter terms offer a higher monthly payment, a somewhat lower interest rate on average, and a lower overall cost.

For example, principal and interest alone on a hypothetical $250,000 mortgage at a fixed 6% interest rate over 30 years would be approximately $1,500 per month. The total in principal and interest over the 30 years comes to approximately $539,500. Note that these figures do not include property taxes, homeowner's insurance, or PMI if applicable. We're just looking at borrowing cost - not total monthly cost.

A 15 year, $250,000 loan at 5.5% would result in roughly $2,050 per month in principal and interest - $550 more per month. But while the payment is higher, there are potential benefits. Not only will the mortgage be paid in half the time, but the interest rate may be lower and the overall principal and interest cost is considerably lower at $367,500. That's $172,000 cheaper than the 30 year option.

Mortgage Term Choices

Why would anyone choose a 30 year mortgage when a 15 year mortgage is so much cheaper? There are several reasons. As we mentioned before, a longer term lets you purchase a more expensive home. If you could afford to pay the $2,050 per month used in the previous example for a 15 year term, you could afford to buy a home worth nearly $350,000 - that's almost $100,000 more home, a significant difference. A more expensive home may be bigger, in better repair, or in a nicer neighborhood - factors to also consider when making a major investment.

Mortgage interest may be tax deductible for borrowers who itemize deductions on their federal return - though whether itemizing makes sense depends on your individual tax situation and current law. For example, for those in a 28% tax bracket, the hypothetical federal tax benefit could be up to $81,000 over the course of the loan for the 30 year option, while it could be up to $33,000 for a 15 year loan. Your actual benefit will depend on your tax bracket, whether you itemize, and tax law at the time. Consulting a tax professional is the best way to understand how mortgage interest deductions might apply to your situation.

Next, keep in mind that the dollar amounts cited in the mortgage calculations are in current dollars. Because of inflation, the cost of your debt relative to your income is likely to get smaller and smaller. Salaries don't always grow inline with inflation, but roughly speaking and using the average inflation rate over the last 30 years as a guide: if someone earns $75,000 per year when they take out a 30-year mortgage, in 30 years the salary could be nearly $225,000 per year. Again, salary growth in lockstep with inflation isn't guaranteed. But hypothetically, including inflation into the mix shrinks the difference - but doesn't eliminate it.

Finally, here's another way to think about it: if you chose a 30-year mortgage and later had no payment for the final 15 years, you could redirect that money into savings or investments. How much you might accumulate depends on how much you invest and what return you earn - and returns are never guaranteed. But having no mortgage payment does offer more flexibility, no matter how you choose to allocate the money.

Adjustable Rate Mortgage

The next type of mortgage is the adjustable rate mortgage (ARM). Unlike a fixed rate mortgage, the interest of an adjustable rate mortgage may change many times over the term of the loan. Interest rates are typically determined by a widely accepted standard, such as federal interest rates, and will vary depending on that rate. In the event of a large interest rate increase, the amount of a mortgage payment could go up significantly. For example, if a mortgage interest rate was to increase from 5% to 10%, the monthly payment on a 30 year $250,000 mortgage would increase around $850 per month.

One of the reasons adjustable rate mortgages are popular is that they may enable people to buy a more expensive home than they would otherwise be able to afford. ARMs typically start with an introductory interest rate that's fixed for a set period - often several years - before adjusting. That initial rate is often lower than the rate on a comparable fixed-rate mortgage, though the difference varies by market conditions and loan terms. Once the introductory period ends, the rate adjusts periodically based on a market index.

Some people use adjustable rate mortgages because they think they will make more money in a few years or will sell the house quickly. Such assumptions may work out in the buyer's favor, but often they may not. ARMs carry more uncertainty than fixed-rate mortgages, and it's worth carefully considering how your budget would handle a significant payment increase.

Other Types of Loans

There are a couple of other loan programs that are available to some home buyers. In both of these programs, a government agency guarantees the loan, sometimes making the loans less expensive than the conventional options outlined above.

• Veterans Administration (VA) Loans - If you're a veteran or active-duty service member, you may be eligible for a VA loan, which is backed by the U.S. Department of Veterans Affairs. VA loans can offer benefits such as no required down payment in some cases, though eligibility and specific terms depend on your service history, lender, and other factors. It's worth speaking with a VA-approved lender to understand what you may qualify for.

• Federal Housing Administration (FHA) Loans - Backed by the federal government, FHA loans can make homeownership more accessible, particularly for buyers with smaller down payments or lower credit scores. However, FHA loans require mortgage insurance premiums that may add to your long-term cost. Whether an FHA loan is less expensive than a conventional loan depends on your credit profile, down payment, and how long you keep the loan. There's also more red tape involved with these loans, and not all sellers will agree to a FHA loan. Homes purchased with these loans must also pass a rigorous FHA inspection, meaning that fixer-upper homes may not qualify.

Whether these options are ultimately less expensive than conventional options depends on your credit profile, down payment, loan type, and how long you keep the loan.

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