As I look back on the metro Atlanta residential real estate market this year, the number one story has been interest rates. And with the Federal Reserve seeming to take a moderate position on rate increases, the low cost of financing may well be the top story of next year, as well.

Chairman Alan Greenspan recently suggested that mortgage rates might be higher during 2005, but likely only by about one percent. If that is the case, I expect the housing market to remain a vital part of the economy for next year.

Here are some of the most commonly asked questions I receive regarding the costs of financing:

Q: What type of loan is best for me, fixed or adjustable?

A: It depends on your individual situation, and how long you plan to own the property you are financing.

With long term rates still hovering under 6%, it probably makes sense to lock in a fixed rate loan. That way, you can be sure your payments of principal and interest do not rise in the future.

Q: Are there any circumstances under which you would recommend an adjustable rate loan program?

A: Most adjustable loan programs feature artificially low "teaser" rates in the early years, designed to make them more attractive up front. If you only plan to own the house for a limited period of time, taking advantage of these low rates can be to your advantage.

For example, let’s say you are fairly certain that you will be transferred out of Atlanta by your employer in about five years. But you prefer to own rather than rent in the meantime. In this situation, an adjustable rate loan might benefit you.

There are also "hybrid" loans that combine the benefits of an adjustable loan with the stability of a fixed rate.

The so-called "5 year balloon" allows you to lock in a low rate now for exactly five years, then the loan converts to a one year adjustable. The benefit to you is that the current rate for the first five years is below today’s rate for a 30 year fixed. In fact, it is even slightly below today’s rate for a 15 year loan.

When you sell your current home in five years, you will have consumed the initial low fixed rate period, and will have avoided the uncertainty of a floating rate as well.

Q: Since most people move every six or seven years, wouldn’t it make sense for everyone to use that five year balloon loan?

A: Not necessarily. Many people buying homes today plan to stay longer than five years. Others hope to be able to keep their homes as rental property, even if they move after a time.

In addition, we can not know today what economic conditions may be like in five years. If we assume the worst, those persons who locked in a fixed rate may be glad they did, while others may choose to stay in their homes rather than try to sell in a difficult market.

Q: I already have a low rate on my home loan, but I recently ran up the balance on my home equity line of credit when we finished out the basement. I know the rate on the credit line is adjustable, but it is really low right now. What should we do?

A: Because we are in an environment of rising interest rates, it is only logical to expect that your home equity line of credit rate will increase along with the prime rate as time goes by.

If you plan to have your line of credit paid off within a year, then it is probably best to enjoy the rate you currently have.

However, lines of credit with adjustable terms might not make sense for long term financing. So if it looks like you will need a number of years to pay down the balance on your credit line, it might make more sense to refinance the combined balance of your first mortgage plus your credit line into a new, fixed rate loan.

The benefit is that you have locked in a low long term interest rate that can not rise.

The downside is that the new rate may be higher than the old one, both on your first mortgage and on your equity line of credit. Another downside is that your new refinanced loan will likely incur significant closing costs.

Q: I am buying a new home, but can’t decide between a fifteen year and a thirty year loan program. Which is best?

A: No one loan program is right for everybody.

The thirty year fixed rate loan is the most popular loan today because it combines affordable payments with historically low interest rates.

For those that can afford the higher monthly payments, the fifteen year fixed rate offers even more savings in the interest rate department. The interest rate savings is typically about half a percentage point in lower interest.

Because the thirty year program can be prepaid in whole or in part, it carries the maximum flexibility and still offers a great rate. For those reasons, I would recommend it to anyone trying to decide between the two.