When you decide to purchase a home you will need to start to consider what type of mortgage will be best for you and your situation. You can choose to go with a fixed rate mortgage, which means the interest rate on a fixed rate mortgage remains the same throughout the life of the loan. Your monthly payment (consisting of principal and interest) generally remains the same as well. The entire mortgage is repaid in equal monthly installments over the term (length) of the loan.

Fixed rate mortgages are the most popular and almost 75% of all home mortgages are fixed interest rate mortgages. However, having a fixed interest rate on your mortgage has both positive and negative aspects. If interest rates rise, yours won't; and thus, your monthly mortgage payment will always remain the same. For homeowners on tight budgets or with fixed incomes this can be reassuring and this type of mortgage is typically the best choice.

Another option you can investigate is adjustable rate mortgages (ARMs.) With this type of mortgage, sometime also called a variable rate mortgage, your interest rate is adjusted periodically, rising or falling to keep pace with changes in market interest rate fluctuations. Your monthly payment amount is recalculated with each rate adjustment. Depending on what's specified in the mortgage contract, an ARM can be adjusted semi-annually, quarterly, or even monthly, but most are adjusted annually.

If neither of these options sound appealing, you do have an alternative choice-Hybrid ARM's. Simply put, they are mortgage loans that offer a fixed interest rate for a certain time period (3, 5, 7, or 10 years), and then convert to a 1-year ARM. The initial fixed interest rate on a hybrid ARM is often considerably lower than the rate on either a 15-year or 30-year fixed rate mortgage. The longer the initial fixed-rate term, however, the higher the interest rate for that term will be. Generally speaking, even the lowest of these fixed rates is higher than the initial (teaser) rate of a conventional 1-year ARM.

Hybrid ARMs are ideal for individuals who plan to stay in their homes for a short period of time (3 to 10 years), as they will be able to take advantage of the low initial fixed interest rate without worrying about how the loan will change when it converts to an ARM. If your situation changes and you decide to stay in your home for a longer period of time, look for a hybrid ARM with a conversion option. This option will allow you to convert your loan to a fixed rate loan before it turns into an ARM.

ARM mortgages are somewhat riskier than a fixed rate mortgage, but may benefit you if you have certain needs or find yourself in certain circumstances. In other circumstances, you may be better off with a fixed rate or other type of mortgage. Examine your financial and life situation with the help of your loan officer or financial advisor. Try this mortgage calculator to help you in your decision making.