Two buyers close on similar $400,000 houses in the same week. One puts 20% down on a conventional 30-year fixed. The other puts 5% down on an FHA loan. Both were quoted roughly 6%. By year six, the second buyer has paid somewhere near $25,000 more for the same house, and most of that money went to mortgage insurance rather than principal.
That gap is the honest answer to a question lenders hear every day. There is no single cheapest mortgage sitting on a shelf. There is a cheapest mortgage for your deposit, your credit file, your income type and how long you plan to keep the loan. Get those four things right and the savings are measurable, usually in five figures.
Start with the two loans that usually win
If you can document income and your credit score is above roughly 700, a conventional conforming loan is the cheapest type of mortgage in total cost. There’s no upfront mortgage insurance premium, private mortgage insurance falls away automatically once you reach 78% loan-to-value, and pricing is the most competitive slice of the market because Fannie Mae and Freddie Mac buy those loans in enormous volumes.
If you’ve served in the military, a VA loan generally beats it. No monthly mortgage insurance at all, no down payment required, and rates that are often a quarter point under conventional pricing. The funding fee, 2.15% for a first use with nothing down, is the only meaningful cost and it’s usually rolled into the loan balance.
Everyone else is picking between trade-offs, and those trade-offs are worth understanding properly before you apply. A clear breakdown of what each mortgage type really costs you is a better starting point than any rate table, because the headline number hides most of the expense.
Why the quoted rate is a poor measure of cheap
A 6.4% loan with $6,000 of lender fees is more expensive than a 6.6% loan with $900 of fees if you sell in three years. The rate is only one input. The others:
- Mortgage insurance. FHA charges 0.55% a year on top of a 1.75% upfront premium. On a $350,000 loan that’s $160 a month, forever, unless you refinance out.
- Discount points. One point costs 1% of the loan to buy the rate down. On a $350,000 loan that’s $3,500 to save perhaps $45 a month. It takes six and a half years to break even.
- Closing costs. Origination, appraisal, title insurance, recording fees. These vary by thousands between lenders for identical loans.
- How long you keep it. A 30-year fixed has the highest total interest of any common product. It also has the lowest monthly payment. Cheap depends on which of those you need.
If this is your first purchase, the deposit is the lever that moves everything else. Our guide to the best mortgage type for first-time buyers starts there for exactly that reason.
The realistic contenders, ranked by total cost
VA loans: usually the cheapest money available
No monthly mortgage insurance is the whole story here. On a $350,000 loan, a conventional borrower with 5% down pays roughly $170 a month in PMI. A VA borrower pays nothing, which frees up about $2,000 a year that can go at the principal instead. Add in the absence of a down payment requirement and VA lending is hard to beat for anyone eligible.
Conventional with 20% down
No PMI, best available pricing, and full freedom to shop. The catch is the $80,000 cash requirement on a $400,000 house, which most buyers don’t have. At 10% down you’ll pay somewhere between 0.3% and 0.7% of the loan annually in PMI until you hit 80% LTV, so ask the lender for the exact removal date in writing rather than accepting a vague “it comes off eventually.”
15-year fixed: cheapest per dollar, most expensive per month
Rates on 15-year loans typically run 0.5% to 0.75% below the 30-year equivalent, and you clear the balance in half the time. The trade-off is brutal on cash flow. On $350,000 at 5.75%, you’d pay about $2,906 a month against $2,212 on a 30-year, though you’d save roughly $270,000 in interest. If that monthly figure fits comfortably, it’s the cheapest borrowing most people will ever access. Our step-by-step fixed-rate walkthrough runs the comparison properly with real figures.
Adjustable-rate mortgages: cheap for five years, unknown after
A 5/6 ARM at 6.0% against a 6.5% fixed saves about $114 a month on $350,000, or $6,800 across the initial five-year window. That is genuinely the cheapest option if you’re certain you’ll move or refinance before the first adjustment. It becomes the most expensive option if you’re still there in year eight and rates have climbed two points.
FHA and USDA: cheap to enter, costly to hold
FHA accepts credit scores from 580 with 3.5% down, which is why it dominates the low-deposit market. The price is permanent mortgage insurance in most cases. USDA loans, for eligible rural addresses, hit zero down and charge an annual fee closer to 0.35%, making them cheaper than FHA but rarely cheaper than conventional. Investment property sits in a different pricing universe again, since landlord mortgages carry higher rates and reserve requirements that owner-occupied loans never see.
A worked example on a $350,000 loan
- Conventional 30-year fixed, 6.5%, 20% down: $2,212 a month, no PMI, roughly $446,000 interest over the term.
- Conventional 30-year, 6.75%, 5% down: about $2,270 a month plus $169 PMI, so $2,439 total.
- 15-year fixed, 5.75%: $2,906 a month, around $173,000 total interest.
- 5/6 ARM, 6.0%: $2,098 a month for five years, then it resets.
- FHA, 6.25%, 3.5% down: $2,155 a month plus $160 MIP, and a $6,125 upfront premium added to the balance.
Same house, same street, a spread of roughly $340 a month between the cheapest and most expensive structures. Over five years that’s over $20,000.
Where a cheap mortgage quietly turns expensive
The most common mistake isn’t picking the wrong product. It’s picking the right product and then layering cost onto it.
- Paying points on a short hold. Buying the rate down only works if you stay past the breakeven, typically five to seven years.
- Choosing a 30-year because the payment is lower. It is lower. It also costs about $273,000 more in interest than the 15-year on the numbers above.
- Draining savings for a bigger deposit. A 20% deposit removes PMI, but leaving yourself with $2,000 in the bank turns a burst pipe into a credit card balance at 24%.
- Forgetting that the house is collateral. Every mortgage here is a secured loan, and it’s worth understanding what you’re actually putting on the line before you sign a 30-year charge over it.
- Accepting the first offer. The single biggest driver of cost is how many lenders you made compete.
How to get the cheapest offer on your specific file
Apply to at least four lenders within a two-week window, all on the same day if you can manage it, using identical loan terms so the quotes are comparable. Ask each one for the par rate, which is the rate with zero discount points and zero lender credits. Then ask two follow-up questions: what the PMI removal date is at the current LTV, and whether any lender credit is available in exchange for a slightly higher rate.
Within three business days of each application you must receive a Loan Estimate. Compare page two, section A (origination charges) plus section B (services you cannot shop for) across all four. That combined figure is where the real spread lives, and it’s frequently $3,000 to $5,000 between the cheapest and priciest quote on an identical rate. Take the lowest one back to your preferred lender and ask them to match it. Most will.
The number that matters at the end isn’t the interest rate on the marketing flyer. It’s the total you’ll hand over between closing day and the day you sell or pay it off, divided by the months you actually owned the place. Ask every lender for that figure in writing, on your loan amount, over your expected holding period. The one who can produce it without hesitating is usually the one quoting you the cheapest money.