Which is the best type of Mortgage for me?

Fixed? Adjustable? Terms? Here how to make the decision.

Mortgage rates have stayed relatively low, but they are still considerably above rock-bottom levels reached two years ago, and many worry that they will ultimately head higher.

Still, that's not the only consideration when choosing a mortgage. Here's how to make the decision.

15-year versus 30-year debate

The first question you should ask is, "How much can I afford to pay on a monthly basis?"

Keep in mind, your mortgage payment is only part of what you'll pay to live in your home. You also should budget for furniture, your house's upkeep and the general expenses of life (like, say, food).

A 30-year mortgage will have a lower monthly payment and a higher interest rate than a 15-year mortgage. So you'll have a smaller monthly obligation but you'll pay more for your house over time because you're paying it off with interest for a longer period.

Conversely, a 15-year mortgage will have a higher monthly payment and a lower interest rate so you'll pay less for your house because you're paying it off in a shorter period.

"For most home buyers, especially first-time buyers, taking a 15-year (or 20-year) mortgage is out of the question," said Keith Gumbinger, vice president for mortgage tracker HSH Associates. The higher monthly payments are often too much to handle for these types of buyers.

But for home buyers with sufficient income and a desire to be mortgage-free in a short time, a 15-year loan might be a good bet.

Fixed versus adjustable-rate conundrum

The second question you should ask is, "How long will you be in the house?" You probably can't answer with absolute certainty, but you can play the odds.

Say, for example, you're single and buying a small condo but you can easily envision yourself married; or you've just started a family and plan to expand it at some point. Chances are good you'll want to trade up to a new home in five to seven years. On the other hand, maybe you've had your family and want to settle into a place with a good school system, which your kids will be using for the next 12 years.

Whatever the answer, it will help you decide whether it makes sense to get a fixed-rate or an adjustable-rate mortgage (ARM).

A fixed-rate mortgage locks in a rate for the length of your loan.

ARMs, meanwhile, are short-term fixed-rate loans: After the fixed rate term is up, the rate adjusts at regular intervals in accordance with current interest rate conditions at that time. A 5/1 ARM, for example, has a fixed rate for five years and then adjusts every year for the next 25 years. (ARMs typically run on a 30-year schedule.)

The length of the fixed-rate term on an ARM typically can range anywhere from one month to 10 years. The longer the rate is fixed, the higher the interest rate you'll get. But generally speaking -- and there have been exceptions in the past -- ARMs will cost you less in the short-term. With the ARM, both your monthly payments and interest rates should be lower than either a fixed rate 15-year or 30-year mortgage. The risk with an ARM is that when interest rates rise, you could end up paying much more than you bargained for. "You're subject to the vagaries of the market," Gumbinger said. That's why in today's low-rate environment, he noted, "You want to maximize the fixed-rate picture to match your time frame."

If you know you'll be in a home for 12 years or more, a 30-year fixed rate mortgage might work better for you than, say, a 5/1 ARM, where you fix a rate for five years and then it adjusts every year after that. But if you think you won't be in the home longer than five or six years, a 5/1 ARM might make more sense.

A dollars-and-sense exercise

Say you need a $200,000 loan to buy a home and you can get the current average rates for a 30-year fixed, a 15-year fixed, or a 5/1 adjustable rate mortgage.

If the 30-year fixed rate mortgage is at 6.62 percent - a level it was at just a few months ago - your monthly payment would be $1,280. The interest you pay over the life of your loan would total $260,786.

With a 15-year fixed rate at 5.94 percent, your monthly payment would be $1,681. The interest you pay over the life of your loan would total $102,623, or about $158,163 less than the 30-year fixed.

With a 5/1 ARM at 4.20 percent, your monthly payment would be $978 for the first five years. The total interest you pay over the life of the loan if you stayed in your home past five years is anyone's guess because your rate would then adjust annually. But if you move after five years, that won't be an issue.

Adjustable-rate mortgage indexes explained, (Bank Rate)

About one in five mortgage applicants nowadays gets an adjustable-rate mortgage, or ARM. The hardest-to-understand element of an ARM is the index.

When you get an ARM, two main factors determine the rate you pay: the index and the margin. The index is a rate set by market forces and published by a neutral third party. The margin is an agreed-upon number of percentage points that is added to the index to determine your rate.

A thorough mortgage shopper will run across a bunch of acronyms to denote various ARM indexes, such as COFI, LIBOR, MAT and CMT. Each index responds at its own peculiar pace to the economy's ups and downs.

Indexes can be divided into two broad categories: those based upon rate averages and those based upon more volatile spot rates. There is some overlap between the two categories. ARMs indexed to average rates tend to move more slowly, in rather gradual steps, whether the markets are rising or falling. ARMs based on spot rates go up and down abruptly.

Larry Goldstone, president of Thornburg Mortgage, a portfolio lender that focuses principally on ARMs, says ARMs based on averages tend to have higher margins than ARMs based on spot rates.

Someone who gets an ARM indexed to rate averages "gets one benefit and one drawback," Goldstone says. "The benefit is that, in a changing rate environment, an average index will move more slowly, so the payment changes more slowly. The drawback is that the margin typically is higher, and so the rate you pay is higher."

Indexes based on average rates include the 11th District Cost of Funds Index, or COFI, and the 12-month moving Treasury average, (variously called the MTA and the MAT, for monthly average Treasury).

Of indexes based on spot rates, among the most popular is the LIBOR, one-month London Interbank Offered Rate, for London Interbank Offered Rate. Then there is the constant maturity Treasury, or CMT, index, which comes from a short-term average that acts more like a spot rate. Other spot indexes are based on the prime rate and yields on certificates of deposit.

One way to compare ARMs with different index options is to look at their fluctuations in a graph. That will help you understand how rapidly and how much the rates change.

Here is a rundown of some of the popular types of adjustable-rate mortgages, how they work and who they are suited for:

11th District Cost of Funds Index, or COFI, index: Rates on COFI-indexed mortgages move up and down slowly. With most COFI-based loans, the rate is adjusted every month and the monthly payment is adjusted once a year. This means that some borrowers can end up owing more than they borrowed if their payments don't cover all the interest due, a phenomenon called "negative amortization."

COFI-based loans are indexed to the cost of funds for the 11th district of the Federal Home Loan Bank system. The 11th district consists of banks based in Arizona, California and Nevada. The cost of funds index is a weighted average of the interest that member banks pay on money they borrow, mostly on customers' checking and savings accounts.

Anyone who has had a savings, money market or interest-bearing savings account knows that those rates are low and move tortoise-like. The COFI (pronounced "coffee") is calculated at the end of every month for the previous month, so it lags the overall market. The COFI's slow, lagging pace benefits borrowers when rates are rising, but not when rates are falling.

12-month Treasury average, MTA or MAT, indexes: Rates on ARMS indexed to the 12-month average of the one-year Treasury bill are usually called the "12 MAT" or "12 MTA." Every month, the U.S. Treasury calculates and publishes the average yield on a constant-maturity one-year Treasury bill for the previous month. The 12 MAT index takes the average of the last 12 averages.

Like the COFI, the rate on a 12 MAT is adjusted every month. Depending on the loan program, the monthly payment might be adjusted every month or once a year.

Rates indexed to the last 12 monthly averages for one-year Treasuries move slowly. "If interest rates were to go up 100 basis points tomorrow," says Goldstone -- in other words, if they rose 1 percentage point -- "that index would go up only one-twelfth of 1 percent the next month. And then the second twelfth the next month, and so on."

The 12 MAT index reacts slowly to fluctuations in short-term rates and smoothes them out.

London Interbank Offered Rate, or LIBOR, indexes: The LIBOR (pronounced "LIE-bore") tracks the rates at which London banks pay to borrow one another's reserves. It fluctuates more rapidly than the COFI or 12 MAT. The LIBOR is sort of a rough equivalent of the federal funds rate in the United States, but it is set by the market, not a government entity.

There are various LIBOR maturities. The most common are one-month, six-month and 12-month. Typically, a one-month LIBOR will be based on the rate for a one-month loan between London banks, and a mortgage based on the one-month LIBOR would be adjusted every month. A six-month LIBOR would be based on the rate for a six-month loan between London banks, and the mortgage based on that rate would be adjusted every six months.

"It is an index that has wider coverage and wider sensitivity to the world, rather than just the domestic market," says Anthony Hsieh, CEO of HomeLoanCenter.com. Lenders like the LIBOR because it "is very sensitive to both up and down markets, on the rise and the decrease," Hsieh says. The borrower shares the risk with the lender.

Constant-maturity Treasury, or CMT, indexes: These indexes follow the weekly or monthly fluctuations in the yields for one-year Treasury bills. The rates on CMT-indexed ARMs move up and down rather quickly. Most CMT-indexed mortgages are adjusted once a year.

CMT-indexed loans are among the most popular ARMs. Hybrid ARMs -- home loans that have a fixed rate for the first few years, then adjusts annually -- usually turn into CMT-indexed mortgages when they enter their adjustment periods.

If you're paying attention, you might have noticed that CMT-indexed mortgages are based on a weekly or monthly average and adjust once a year, while MAT-indexed mortgages are based on an annual average and adjust every month. It's one of the quirks of the mortgage business.

Mortgage bankers say it's important that a borrower understand ARM indexes. But there are other things to consider: the margin, the caps on how high the rate can go and other features.

Some loan programs give you three or four choices for each month's payment: You might have the option of making a "minimum payment" that might not even cover the interest accrued in the past month (the aforementioned negative amortization), an interest-only payment, a fully amortizing payment or a full payment plus some extra to be applied to principal.

Other features to look for include the ability of a home's future buyer to assume the mortgage and the capability to modify the loan -- to switch to another index without having to go through an expensive refinance.

10 Ways To Improve Your Credit (Forbes.com)

1. Maintain a small number of revolving accounts with high limits, and pay off the balances each month.
2. Don't apply for credit indiscriminately. Lots of 'hard inquiries' in your credit file will damage your credit rating.
3. If you accidentally make a late mortgage or other loan payment, ask the lender for forgiveness "just this once", "It works."
4. Get a new credit card and don't use it. Your FICO score is based upon a ratio of the overall percentage of outstanding debt divided by available credit. A new credit card increases your total available credit.
5. If you have a credit card balance, make larger payments than the minimum and make payments on time--no matter what.
6. One of the most damaging aspects of credit card debt is owing more than the limit on the particular card. Pay this off first. Try negotiating interest rates with your credit card company.
7. Don't let companies do unnecessary inquiries on your account, says Elaine Scoggins, a certified financial planner in Seattle. For instance, if you are shopping for a car, but don't plan to buy yet; don't let the dealer check your credit. If you don't need it, leave it. Only seek credit when you need credit. Ten percent of your FICO score is based on new credit account opened.
8. If you are getting a divorce, be sure to contact creditors so you can replace joint credit cards and other loans with ones in your own name.
9. Never max out a credit card account. It is better spread the debt across several accounts. A good rule of thumb is not to be above 80% of the actual credit limit. It is better to owe $5,000 on two cards each with a $5,000 limit than it is to owe $5,000 on one card with a $5,000 limit.
10. Never close the lines of credit that you use responsibly. Keep them open and maintain them for a long time, and your score will improve. However, if your debt is reasonable, you might consider closing unused credit lines. Close the account and get confirmation in writing that they are closed.