The Most Home For Your Money - selecting the best mortgage

This basic one-year ARM was a good fit for Brown-Postell, who was willing to assume the risk of higher future rates because her job was secure and her income from freelance assignments likely to increase. Also, "She got a 6.5% loan," says Virginia Siler, the loan officer at Wells Fargo in Dayton, who helped Brown-Postell through the process. "This loan is called a `1 and 5 loan,' meaning that the interest rate can go up no more than 1% per year and 5% over the life of the loan, for a cap of 11.5%. We used a 7.5% rate--assuming a 1% increase after one year--to compare the projected payment with her monthly income and qualify her for the loan."

The loan is structured so that Brown-Postell can refinance it easily if interest rates fall in the future, according to Siler. "No credit check will be necessary; all that will need to be done is to reconfirm the value of the house. Even if rates don't fall, she should be all right because [Brown-Postell] can expect her income to increase during her professional career," says Siler.

* Hybrid mortgages. "We're seeing tremendous interest in fixed-adjustable loans," says Doug Perry, vice president of production, Countrywide Home Loans, in Calabasas, California. "They offer a fixed rate for three, five, seven or 10 years, after which the rate adjusts every year." Thus, borrowers have some security, knowing that their monthly payments won't increase for a certain number of years, as well as a lower rate. Choosing a three-or a five-year hybrid mortgage (the most popular types) could shave 0.5% to 0.65% from a 30-year fixed mortgage rate. A hybrid mortgage can help home buyers buy more house than they would otherwise qualify for, with the expectation that future increases in the buyer's income will cover interest-rate hikes.

A hybrid loan appealed to Stan Carter, 37, and his wife, Amey, 32, both teachers in Montgomery, Alabama. "We shopped around and wound up with a three-year ARM," says Stan, "because the rate was attractive." The Carters paid one point [see sidebar for an explanation of these upfront fees], "and got a 6.5% loan. After three years, the loan can go up by as much as 1% per year, but no more than five percentage points over the life of the loan." With a loan of over $190,000 from Countrywide, the Carters were able to move into a $200,000 house in Montgomery.

In terms of what's most attractive to home buyers right now, "We've seen fixed-rate mortgages go from 90% to 70% of the overall market," says Gumbinger. "Adjustable-rate loans, especially hybrids, are becoming more popular." In fact, according to the Mortgage Bankers Association, 28% of all loans made in the third quarter of last year were adjustable-rate loans (up from 12% for the same period a year ago). "However, an 8.3% rate on a 30-year mortgage is not the end of the world, so there are plenty of takers out there," he says. (For more on today's mortgage choices, see "Playing the Mortgage Game" in Moneywise, this issue.)

STEP TWO: SEPARATE THE GIMMICKS FROM THE GOOD DEALS