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Avoid mortgages with a prepayment penalty. Often in the small print, a pre-payment penalty can cost you thousands of dollars. It is meant to discourage you from refinancing your mortgage.

Fixed rate mortgage loans, in the current interest rate environment (2005) make the most sense, especially if you plan on living in your new home for several years. Rates are almost certain to rise in the near term. Even if they do not rise, an adjustable rate mortage's rate will rise. Most banks set the initial rate low in order to entice new borrowers. However, as soon as they get the chance, they will raise the rate. Right now, 30-year and 15-year fixed-rate loans are very low. It is also unlikely that rates will fall again to a level where refinancing is worth the fees and closing costs.

Adjustable rate mortgages may appeal to consumers looking to purchase a home, especially if the house they want to buy is a bit larger than they could otherwise afford. Rates on adjustable mortgages, at least in the beginning, tend to be much lower than fixed-rate home loans. This means you may be able to get a house that is much larger and more luxurious with the same monthly payment. Moreover, if interest rates in your area are high, you may choose an ARM to take advantage of it's "built-in refinancing" - if rates fall, so does your loan's rate. You will not have to go through the expense of refinancing.

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