Adjustable-rate mortgages

Rates charged during the initial periods are generally lower than those on comparable fixed-rate mortgages. After all, lenders have to offer something to make it worth their while to assume the risk of higher rates in the future.

The initial fixed-rate period can be as short as a month or as long as 10 years. One-year ARMs, which have their first adjustment after one year, used to be the most popular adjustable, and were the benchmark. Recently the standard has become the 5/1 ARM, which has an initial fixed-rate period that lasts five years; the rate is adjusted annually thereafter. That type of mortgage, which mixes a lengthy fixed period with an even lengthier adjustable period, is known as a hybrid. Other popular hybrid ARMs are the 3/1, the 7/1 and the 10/1.

Deciding between an ARM and a fixed-rate mortgage

Now that you know the difference between the two types of mortgages, we'll compare them side-by-side to make it easy for you to decide which to take.

Feature lower rates and payments early on in the loan term. Because lenders can use the lower payment when qualifying borrowers, people can buy larger homes than they otherwise could buy.

Allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay a whole new set of closing costs and fees, ARM borrowers just sit back and watch the rates -- and their monthly payments -- fall.

Help borrowers save and invest more money. Someone who has a payment that's $100 less with an ARM can save that money and earn more off it in a higher-yielding investment.

Offer a cheap way for borrowers who don't plan on living in one place for very long to buy a house.

Subprime mortgages

Generally, subprime mortgages are for borrowers with credit scores under 620. Credit scores range from about 300 to about 900, with most consumers landing in the 600s and 700s. Someone who is habitually late in paying bills, and especially someone who falls behind on debts by 30 or 60 or 90 days or more, will suffer from a plummeting credit score. If it falls below 620, that consumer is in subprime territory.

Few lenders will use the term "subprime" to describe you or your loan, because it's considered bad salesmanship. You might hear the word "non-prime" or, more likely, an adjective won't be used to describe the mortgage at all.

Other types of mortgages

Jumbo mortgage

This is considered a nonconforming loan because it exceeds the loan limit set by Fannie Mae and Freddie Mac, the two publicly chartered corporations that buy mortgage loans from lenders, thereby ensuring that mortgage money is available at all times in all locations around the country. The single-family limit changes annually and the current limit is always posted on Bankrate. If you need to borrow more than that, you will need a jumbo mortgage, which generally has a higher interest rate than "conforming" loans. Bankrate.com also surveys jumbo mortgage rates.

JTwo-step mortgage

These are mortgages that combine elements of fixed and adjustable-rate mortgages. They go by confusing names such as 2/28, 5/25 or 7/23. A two-step mortgage features a fixed rate and payment for an initial period, followed by one adjustment, then a fixed rate and payment for the remainder of the loan term. A 7/23, for example, has an initial fixed period of seven years, an adjustment, and then 23 more years of payments following the adjustment.