Three types of mortgage dominate the American housing market. Each one has its own benefits and problems. It is important that anyone shopping for real estate understand the different types of mortgages so that they can decide which one is best for them.

The simplist and most common form of mortgage is the fixed rate loan. In these mortgages the interest rate is locked in with the loan application and remains constant for the entire life of the mortgage. These mortgages are easier to plan for, since the monthly payments will stay basically the same. While taxes and insurance may fluctuate over time, they won’t have a significant impact on the payment, so borrowers can easily use a Mortgage Payment Calculator to estimate what their payments will be.

An adjustable rate mortgage, or ARM, is a more speculative type of mortgage. In these cases borrowers are betting the mortgage rates will stay relatively stable or even fall. The mortgage rate on an ARM is recalculated on a regular schedule and is usually based on one of the main mortgage indices, such as the Treasury Index or the Prime Rate. The schedule for calculating interest can be annually or quarterly or even monthly. This means that borrowers will have to deal with changing mortgage payment amounts throughout the loan.

A hybrid mortgage is a combination of the other two. These loans generally start out with a fixed mortgage rate for a period such as three or five years. After that the mortgage turns into an ARM and borrowers are subject to fluctuating mortgage payments.