With so many mortgage loans out there, it can take time to sift through the fine points and find the one that's right for you. Why so many choices? There's no one loan that works for everyone. Each type of mortgage has its pros and cons and it's up to you to decide which one is best for your situation.

TYPES OF LOANS

Fixed Rate Mortgages
One of the most common types of mortgage loans in the U.S. is a fixed rate mortgage. As the name implies, on a fixed rate mortgage, the interest rate for the regular monthly payment typically stays fixed for the life of the loan, and the regular monthly principal and interest payments usually do not change. Typical terms for these mortgages span 15 or 30 years.

• Your mortgage payment is not affected by interest rate increases
• Consistent monthly payments mean it's easier to budget your finances
• Low down payment programs are available

• At the time of financing, fixed rate mortgages tend to have higher interest rates than adjustable rate mortgages
• Your mortgage payment will not go down if interest rates decrease

Adjustable Rate Mortgages (ARM)
Another option is the adjustable rate mortgage. Instead of a fixed rate, ARM loans have rates that periodically adjust based on the type of ARM loan. Two common ARM loan types are:

Traditional ARM - A traditional ARM rate adjusts at set increments for the life of the loan. For example, the interest rate on a 1-year ARM is fixed for the first 12 months and adjusts every 12 months afterwards. A traditional ARM offers a lower interest rate than a hybrid ARM, though it adjusts more frequently.

Hybrid ARM – A hybrid ARM has an initial period, such as 3, 5, 7 or even 10 years, during which the interest rate does not change. After this initial period is over, the interest rate will adjust periodically with market conditions. The adjustment period is often 6 months or 1 year. For example, a 5/1 hybrid ARM has an initial rate for the first 5 years that does not change; after that the rate adjusts every year.

• The initial interest rate tends to be lower than that of a fixed rate mortgage
• If you know you'll be in your home for less than the term of the mortgage, you may end up paying less than with a fixed rate loan
• Because the interest rate and payment amount may be lower than a fixed rate loan, it may be easier to qualify for this type of loan
• The interest rate you pay will generally drop if prevailing interest rates decrease

• If interest rates increase then your payment will also increase
• Future interest rate increases could make your house unaffordable