There are more mortgage options out there than most people realize, and choosing the wrong one can cost you. This guide covers every loan type AGCU offers, how each one works, and who it makes the most sense for, so you can find the right fit before you ever fill out an application.

Fixed-Rate vs. Adjustable-Rate (ARM)

With a fixed-rate mortgage, your interest rate and principal/interest payment stay the same for the life of the loan, typically 15 or 30 years. It’s a good fit for buyers who plan to stay in the home for several years and want the peace of mind that comes with a predictable payment.

Pros

• Your monthly payment never changes, making it easier to budget
• You’re protected if market rates rise after you close
• Simple and easy to understand, no complicated moving parts

Cons

• The starting rate is usually a bit higher than an ARM’s intro rate
• If rates drop later, you’d need to refinance to take advantage

Adjustable-Rate Mortgage (ARM) (e.g., 1/1, 5/1, 6/1, 7/1)

An adjustable-rate mortgage starts with a lower fixed rate for a set period, typically 1, 5, 6, or 7 years, then adjusts on a schedule (usually once a year) within caps that limit how much the rate can change at one time and over the life of the loan. It’s worth considering if you plan to move, sell, or refinance before the first adjustment, or if you’re comfortable with the possibility of payment changes down the road.

Pros

• Lower starting rate and payment compared to a fixed-rate loan
• Can save a meaningful amount of interest during the initial fixed period

Cons

• Your payment can rise once the fixed period ends
• More to understand upfront, including how indexes, margins, and caps work together

Conventional vs. Government-Backed Loans

Conventional (Conforming) Loans

Conventional loans meet Fannie Mae and Freddie Mac guidelines, with down payments starting as low as 3% for qualified borrowers. If you put down less than 20%, you’ll pay Private Mortgage Insurance (PMI), though the good news is you can typically request to have it removed once you reach around 20% equity. These loans are a strong fit for borrowers with solid credit, steady income, and at least some down payment saved up.

Pros

• Competitive rates for borrowers with strong credit
• PMI can be canceled once you build enough equity, which saves money over time
• Flexible options for different property types and occupancy situations

Cons

• Credit and income requirements are stricter than most government-backed programs
• PMI adds to your monthly cost if you put down less than 20% at closing

Jumbo Conventional

A jumbo loan is a conventional mortgage that exceeds the conforming loan limit in your area, making it the go-to option for financing higher-priced homes that fall outside standard guidelines.

Pros

• Allows you to finance homes that exceed conventional loan limits

Cons

• Tighter requirements for credit, income, and cash reserves
• Rates can run higher than a standard conventional loan

FHA (Federal Housing Administration)

FHA loans are government-insured mortgages designed to make homeownership more accessible, especially for first-time buyers or those still building their credit. Down payment requirements and credit guidelines are more flexible than most conventional options.

Pros

• Lower down payment requirements, as little as 3.5% down
• More lenient credit score guidelines than conventional loans

Cons

• Mortgage Insurance Premium (MIP) is required and can last the life of the loan depending on your down payment
• The home must meet certain property standards to qualify

VA (U.S. Department of Veterans Affairs)

VA loans are a well-earned benefit for eligible veterans, active-duty service members, and some surviving spouses. For most purchases, no down payment is required, and there’s no monthly mortgage insurance to worry about.

Pros

• No down payment required for most purchases
• No monthly mortgage insurance
• Competitive rates

Cons

• A VA funding fee may apply, though exemptions exist for some borrowers
• You must meet VA eligibility requirements to qualify

USDA (U.S. Department of Agriculture)

USDA loans are a zero-down mortgage option for eligible borrowers purchasing homes in designated rural and some suburban areas. Income limits apply, but for those who qualify, they offer an accessible path to homeownership without the need for a down payment.

Pros

• No down payment for eligible borrowers
• Competitive fixed rates

Cons

• Geographic and household income restrictions
• Upfront and annual guarantee fees

First Mortgages, Second Mortgages & Home Equity

First Mortgage

A first mortgage is the primary loan used to purchase or refinance a property. Most of the loan types covered above fall into this category. It’s the foundation of your home financing, and any other loans secured by the property come after it.

Second Mortgage (Home Equity Loan)

A home equity loan lets you borrow against the equity you’ve built in your home as a one-time lump sum at a fixed rate. It sits on top of your existing first mortgage, which stays in place. It’s a solid option when you have a specific, known expense in mind, like a renovation or debt consolidation, and you want predictable payments with a set payoff date.

Pros

• Fixed rate and fixed payment for the life of the loan
• Your existing first mortgage and rate stay untouched
• Good for one-time, defined expenses

Cons

• Adds a second monthly payment to your budget
• Closing costs apply and your home is used as collateral

HELOC (Home Equity Line of Credit)

A HELOC works more like a credit card than a traditional loan. You’re approved for a line of credit secured by your home’s equity, and you draw from it as needed during the draw period. After that, you enter a repayment period. Rates are typically variable, so your payment can shift over time.

Pros

• Flexible, borrow only what you need when you need it
• Interest is often lower than unsecured credit options
• Well suited for ongoing or unpredictable expenses like phased projects or tuition

Cons

• Variable rate means your payment can change
• Requires discipline to avoid overborrowing
• Your home is on the line if you can’t repay

HELOC vs. Second Mortgage, at a glance

Refinancing: Rate-and-Term vs. Cash-Out

Rate-and-Term Refinance

A rate-and-term refinance replaces your current mortgage with a new one, without changing the loan balance. The goal is usually to lock in a lower rate, shorten your term (say, from 30 years down to 15), or switch from an adjustable rate to a fixed one. It’s one of the more straightforward ways to improve your loan without tapping into your equity.

Pros

• Can lower your monthly payment or help you pay off the home faster
• Switching to a fixed rate makes budgeting more predictable

Cons

• Closing costs apply, so it’s worth calculating your break-even point first
• Extending your term restarts the clock and can add to your total interest paid over time

Cash-Out Refinance

A cash-out refinance lets you refinance for more than you currently owe and take the difference as cash, using the equity you’ve built up in your home. It’s a way to access larger funds at mortgage rates, which are typically lower than what you’d pay on a personal loan or credit card.

Pros

• Access to a significant amount of cash at mortgage rates
• Consolidates debt into a single monthly payment instead of juggling multiple bills

Cons

• Results in a larger loan balance than you had before
• Closing costs apply and your rate may be slightly higher than a rate-and-term refi
• Reduces your equity cushion, leaving less of a financial buffer in your home

A quick tip: Before moving forward with any refinance, ask your AGCU loan officer for a break-even analysis. It shows you exactly how long it takes for your monthly savings to offset the cost of refinancing, so you know whether it actually makes sense for your situation.

Special Structures You’ll Hear About

Temporary Buydowns (3-2-1 and 2-1)

A temporary buydown is a subsidy funded by the seller, builder, or sometimes the lender that reduces your required payment for the first one to three years of the loan. Your actual interest rate doesn’t change, only what you’re required to pay during the buydown period. It can be a helpful way to ease into homeownership while your budget settles, especially in the early years when moving costs and home expenses tend to stack up.

Points vs. No Points

At closing, you have the option to pay points upfront to buy down your interest rate for the life of the loan. The alternative is a no-points option, which keeps your upfront costs lower but comes with a slightly higher rate. Neither is the right answer for everyone. It really comes down to how long you plan to keep the loan. The longer you stay, the more a rate buydown tends to pay off.

Availability varies by program and property. Your AGCU loan officer will walk you through what’s currently on the table for your situation.

How to Choose (Simple Decision Guide)

Buying your first home comes with a lot of decisions, and the mortgage options alone can feel like a lot to sort through. But you don’t need to be a finance expert to land on the right choice. It really comes down to a few practical things: how long you plan to stay in the home, what monthly payment works for your budget, and how much flexibility you want down the road. The steps below will help you think it through.

Step 1: Think about how long you’ll live in the home.

This is one of the most important questions to ask yourself before choosing a loan. If you plan to put down roots for the long haul, you’ll want a payment that stays the same no matter what happens to interest rates. If you think you’ll move or refinance within a few years, starting with a lower rate makes a lot more sense than locking in for 30 years.

• If you want a payment that never changes, a fixed-rate loan is likely your best fit
• If you plan to move or refinance within 5 to 7 years, an adjustable-rate loan could save you money during that time

Step 2: Decide how much flexibility you want.

Not everyone comes into the homebuying process in the same financial position, and the good news is there are loan options built around that. Government-backed loans tend to have more flexible requirements, while conventional loans reward borrowers with stronger credit and more saved up.

• If your credit or down payment needs some flexibility, an FHA loan is worth a close look
• If you are a veteran or active-duty service member, a VA loan is hard to beat
• If the home you are considering is in a rural or suburban area, you may qualify for a USDA loan with no down payment required

Step 3: Look at your monthly budget.

Before settling on a loan, it helps to get honest about what you can comfortably afford each month, not just what a lender says you qualify for. A 30-year loan keeps your payments lower and gives you more breathing room month to month. A 15-year loan means higher payments but you’ll pay significantly less in interest over time and own your home outright much sooner.

• If keeping your monthly payment as low as possible is the priority, a 30-year term is likely the better fit

• If you can handle a higher payment and want to build equity faster, a 15-year term could save you a lot in the long run

Step 4: Consider your equity goals.

Think about what you want your home to do for you financially over time. Paying it off faster means building equity quickly and owning the home outright sooner, but it comes with higher monthly payments. Keeping payments lower frees up cash for other priorities, whether that’s saving, investing, or just having a comfortable cushion each month.

• If building equity and getting out of debt faster is the goal, a shorter loan term is worth the higher payment

• If you’d rather keep more cash available month to month, a longer term gives you that flexibility

Step 5: Think about future needs.

Your financial needs will change over time, and it’s worth choosing a loan that leaves room for that. If you think you’ll want to tap into your home’s equity later for a renovation, tuition, or an unexpected expense, a HELOC or home equity loan can give you that flexibility without touching your original mortgage. And if rates drop or your situation improves, refinancing down the road is always an option worth revisiting.

• If you want access to funds later without changing your current mortgage, a HELOC or home equity loan could be a good fit
• If rates drop significantly after you close, a rate-and-term refinance could lower your payment or shorten your term
• If you need a larger sum and have built up equity, a cash-out refinance is worth exploring

Step 6: Ask questions and get advice.

You don’t have to figure this out on your own. A good loan officer isn’t just there to process paperwork, they’re there to help you think through your situation and find the loan that actually makes sense for your life. Our AGCU mortgage team is happy to walk you through your options, run the numbers on different scenarios, and answer any questions along the way.

Ready to talk? Here’s how to reach us:

• Start your pre-approval at agcuhomeloans.org
• Call Member Care at 866-508-AGCU, Monday through Friday, 7:30 a.m. to 5:00 p.m. CT
• Start a Video Banking call
• Email us at info@agcu.org

Quick Pros & Cons Summary

Frequently Asked Questions

What is the difference between FHA and conventional loans? 

FHA loans are backed by the federal government and designed for borrowers who may not qualify for conventional financing. They allow lower credit scores and smaller down payments, but require mortgage insurance for the life of the loan in most cases. Conventional loans have stricter credit requirements but give you the option to cancel mortgage insurance once you build enough equity.

How much do I need for a down payment? 

It depends on the loan type. VA and USDA loans may require no down payment at all for eligible borrowers. FHA loans require as little as 3.5% down. Conventional loans can start at 3% for qualified buyers. Keep in mind that putting down less than 20% on a conventional loan means you’ll pay mortgage insurance until you reach that threshold.

What is the difference between a HELOC and a home equity loan? 

A home equity loan gives you a lump sum at a fixed rate, which works well for a single large expense where you want a predictable payment. A HELOC works more like a credit card where you draw what you need during a set period at a variable rate. HELOCs work well for ongoing or unpredictable expenses, and neither option requires you to touch your existing first mortgage.

Can I get a mortgage with a low credit score? 

Yes. FHA loans accept credit scores as low as 580 with a 3.5% down payment, or as low as 500 with a larger down payment. VA and USDA loans do not set a hard minimum score, though most lenders look for at least 620. If your credit needs some work, even a small improvement before applying can make a real difference in the rate you qualify for.

What Happens Next?

1. Get pre-approved. You’ll know your price range and show sellers you’re serious.
2. Compare scenarios. Ask us to model fixed vs. ARM, with and without points, or a buydown.
3. Choose confidently. We’ll align your loan with your budget, timeline, and goals.

Let’s Talk About Your Mortgage Options

At AGCU, we pair sound guidance with values-driven service. Whether you’re purchasing your first home, tapping equity, or refinancing, our team will walk with you through every step of the process so you can choose wisely.

• Start your pre-approval: agcuhomeloans.org
• Call Member Care: 866-508-AGCU (Mon–Fri, 7:30 a.m.–5:00 p.m. CT)
• Video Banking: Start a call
• Email: info@agcu.org

AGCU is an Equal Housing Lender. Loan programs, terms, and eligibility are subject to change and approval. This guide is for educational purposes and not legal, tax, or financial advice.