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Congratulations on deciding to buy a new home. Now you should do your homework on what type of home loan you will need. There are two basic home loans available to you, fixed rate and adjustable-rate mortgages.
Fixed-rate mortgage: With a fixed rate mortgage, your interest rate is constant which means your monthly payments are too. This type of mortgage is attractive when interest rates are low.
Adjustable-rate mortgage (ARM): The interest rate on an adjustable-rate mortgage fluctuates with changes in the market interest rate. The upside to this type of loan is that in periods of lower interest rates, your payments will decrease. The downside is that your payments may also increase during periods of higher interest rates.
While there is risk built into the structure of an ARM, there are ways to mitigate some of this risk. One option is to add a limit so that the interest rate only fluctuates within a predetermined range. If you chose this type of structure, you should calculate the worst-case scenario to make sure that you are comfortable with the amount of risk that you're taking on.
If a limit is not for you, there are many other types of ARMs such as COFI, hybrid and balloon to consider. The bottom line is that you should fully understand your personal financial situation and be well informed of your options before making any decisions.
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