The two basic types of loan rates are fixed, which means that you keep the same interest rate for the whole term, and variable, which means that the rate changes over time.

Fixed rates are great when your timing is right and you like knowing exactly what you’re going to pay from month to month. You can “lock in” a low fixed rate and then smile when everybody else’s rates go up. Banks generally charge more for fixed rate loans for this very reason.

Variable rates (also called “floating” or “adjustable” rates, abbreviated ARM for Adjustable-Rate Mortgage) are far more flexible, and they can be a blessing or a curse.

They’re a blessing at the start, because you can almost always get a better rate and monthly payment by going with a variable rate. Also, if you’re not planning to stay in your home for the full term, ARMs may let you pay less than a fixed rate during the first few years, when it really matters, and then move on to your next mortgage before the rates go up too far!

The downside is obvious: if rates go up too high, you’ll be left paying more in interest than the fixed-rate folks. Depending on the period of the ‘lock’, you may find your new mortgage bill to be unexpectedly higher than it was last month, or the payment could stay the same but less is going to the principal and more to interest.

Of course, it can go the other way, too — you could be the one smiling at the fixed-rate folks because your interest rate went down! Though many other factors also change over time (like inflation and the cost of living), the average rate in 2010 is considerably lower than the average rate in 1980 (i.e., 30 years ago, a common term for a mortgage).

Because they can be much more complex, we’ll discuss different aspects of variable-rate mortgages on the next page.