Last week’s column looked at the popular LIBOR home loan and raised the question of how to choose a mortgage. This week we’ll compare adjustable loans to the more popular fixed-rate mortgage.

Long-term fixed rates are the mainstay of home financing. They are available at attractive rates and you usually pay the same amount each month not including taxes or insurance.

The monthly payments include principal, which is the payback of the loan, and interest, which can be thought of as the what you pay for the money you borrowed the previous month.

Fixed rates are available for 10, 15, 20 and 30 years, with the 30-year repayment period having the lowest monthly payments. By far the most popular loan periods are 30 and 15 years.

The big benefit of a long-term fixed rate is the guarantee that your monthly payment won’t go up over the life of the loan. Just the mix of principal and interest changes. Taxes and insurance are likely to rise.

Adjustable rate mortgages (ARMs) usually begin at an attractive below-market interest rate, often called a "teaser" rate because it lures people to take it. The lender reasons that if you can start making payments at an artificially low rate, the lender will benefit later when rates go up.

Lenders like ARMs because the borrower shares some of the risk of rate involved in not knowing what the rates will be in coming years.

Traditional ARMs adjust every one, three or five years. A one-year ARM might start out very low but adjust annually while a five-year ARM might start at a higher rate but remain fixed for five years.

Traditional ARMs often have limits on how much their interest rate can adjust, and these are referred to as "caps and ceilings" on the loan. Typically, a one-year ARM is limited to an adjustment of plus or minus 2 percent a year. In addition, there is usually a lifetime ceiling on how high the interest rate can climb. A ceiling of 6 percent over the start rate is common.

The annual cap and the lifetime ceiling act as safeguards against runaway interest rates and help keep payments affordable.

A traditional ARM might make sense for someone who knows he may not be staying in one place for many years and expects his income to increase.

For example, if you were transferred to Atlanta by an employer known for moving workers every five years, a five-year ARM would make sense because the five-year ARM has a lower start rate than a 30-year fixed rate.

In recent years, lenders created the LIBOR loan, which begins at an extremely low teaser rate. Often, such a rate adjusts every six months and there is no limit on rate changes. In addition, to keep payments extremely low, lenders postpone the principal portion of the monthly payment for a specified time period.

With low interest rates in the past several years, these loans have proved extremely popular, especially with people wanting to get ever more expensive houses. But these loans carry with them the ever-present risk of rate increases.

It is important to remember that the Federal Reserve has raised short-term rates 10 times since last summer, and more rate have been signaled by Fed officials. That’s why I think it’s a good idea to lock in a low rate for the longest term possible, which today is 30 years.

Another consideration when choosing between a fixed and an adjustable rate program is the possibility of prepayment penalties.

Some lenders, knowing that their profits could be lessened by an early refinance or a large pay down of the balance, include prepayment penalties. These can be as high as 5% of the amount prepaid, and often decline over time.

Most penalties are expressed as a declining percentage of the amount prepaid, and the penalty usually disappears after the fifth year. Some lenders allow up to 20 percent of the balance to be prepaid without penalty in any one year.

Prepayment penalties are much more common in adjustable rate loan programs because these loans often start at artificially low rates. In contrast, fixed rate loans typically offer a discounted interest rate for loans of a shorter duration.

Finally, when looking at any adjustable loan, be sure to find out how often the rate can change and also how often the payment amount can change.

If the payment amount changes every six months, you will have less opportunity to prepare for upcoming changes. In addition, with two changes each year, the opportunity for payment increase is typically doubled.

The best advice I can give when it comes to deciding between a fixed rate and an adjustable loan program is to ask you consider a worst case scenario:

* How long are you realistically going to own this house? The shorter your planned ownership, the more attractive an adjustable may be.

* If rates do go up during your ownership, what is the worst-case scenario? If the teaser rate is low enough, you may be better off with an ARM, even under the worst circumstances.

Deciding which of the many available loan programs is right for you may not be a simple process. The primary benefits of adjustable rate loan programs are increased affordability and increased financial flexibility for borrowers who need it. In contrast, the principal benefits of fixed rate loans is stability of cost and payment.

Both programs have a place in the lending market, and it’s up to you to decide which is best for you.