Mortgages come in many sizes and types, and one of the most important decisions borrowers face is whether to take a fixed or an adjustable rate mortgage. The type of mortgage for you depends on many factors, such as your tolerance for risk and how long you expect to stay in your home.

The interest on a fixed rate mortgage remains the same throughout the life of the loan. The entire mortgage is repaid in equal monthly installments over the term of the loan. The good news is, you’re locked in; the bad news is, you’re locked in.

Locking in a fixed interest rate on the mortgage has good and bad points. If interest rates rise, yours won’t. Your monthly mortgage payment will always remain the same. This can be reassuring to homeowners on tight budgets or with fixed incomes. Fixed rate mortgages often appeal to individuals with a low tolerance for the risk associated with fluctuating monthly payments.

But if interest rates go down, yours won’t, and your (now high) mortgage payment will remain the same. While you might be able to refinance your home, paying off the higher-rate mortgage with one that carries a lower rate, this isn’t always possible.

In addition, the interest rate might need to drop significantly to offset the expenses associated with refinancing, and you’d need to remain in your home long enough to allow the monthly savings associated with the lower rate to recoup those expenses.

With an ARM, also called an adjustable rate mortgage, your interest rate is adjusted periodically, rising or falling to keep pace with changes in market interest rate fluctuations. Since the term of your mortgage remains constant, the amount necessary to pay off your loan by the end of the term changes as your loan’s interest rate changes. Thus, your monthly payment amount is recalculated with each rate adjustment.

Depending on what’s specified in the mortgage contract, an ARM can be adjusted semiannually, quarterly, or even monthly, but most are adjusted annually. The adjustments are made on the basis of a formula specified in the mortgage contract.

To adjust the rate, the lender uses an index that reflects general interest rate trends, such as the one-year Treasury securities index.

What’s to keep the interest rate from going through the roof — or, for that matter, from plunging through the floor? Most ARMs specify interest rate caps. The periodic adjustment cap may limit the amount of rate change, up or down, allowed at any single adjustment period. A lifetime cap may indicate that the interest rate may not go any higher — or lower — than a specified percentage over — or under — the initial interest rate.

The initial interest rates (referred to as teaser rates) on ARMs are generally lower than the rates on fixed rate mortgages. If you can tolerate uncertainty in your mortgage interest rate and fluctuations in your monthly mortgage payment amount, believe that interest rates will stay low or go lower in the future, or plan to live in your home for only a short period of time, you may want to consider an ARM.

Call or write Tom at 1030 Seminary St., Ste. D, Napa CA 94559, 254-0155, fax 254-0158 or e-mail suntrm@aol.com.