Selecting a mortgage is one of the most important choices you will ever make as a homeowner. The right type of mortgage can help you meet your financial goals while the wrong mortgage can have a huge impact on your finances and create intense emotional stress in your relationships. To find the type of mortgage that bests suits your financial needs, compare your financial situation to the specifics of each type of mortgage. Depending on your qualifications, you may have four possible types of mortgages to choose from: Adjustable Rate Mortgages (ARM), Conventional Fixed-Rate Mortgages, Federal Housing Administration (FHA) and Veterans Administration (VA) loans.

Is an ARM Right for You?

The primary advantage of selecting an ARM is the borrower's ability to take advantage of low market interest rates. Other advantages include the potential for qualifying for a more expensive home (lower interest rates and payments can translate to qualifying for a larger loan) and cheaper loan costs (in points compared to fixed-rate mortgages).

Most people, however, are wary of selecting an ARM and for good reasons. An ARM is linked to a financial index. This means when market interest rates are low, mortgage payments are low, but when market interest rates start to climb, so will the amount of the payments. Under this scenario, even with incremental caps on the amount that a rate or payment can rise, it is still possible for a borrower to start out with payments of less than $700 and in just a few short months, have a $1100 mortgage payment. While many people would agree that low mortgage payments are nice, most people do not have the financial resources to cope with increasing mortgage payments.

Bottomline: An ARM is not for the faint-hearted or financially insecure.

Selecting a Fixed-Rate Mortgage

A conventional fixed-rate mortgage might be the best choice if you plan to stay in your new home for more than a couple of years. Conventional fixed-rate mortages are available in 15, 20, 30-year increments. The advantage to a fixed-rate mortgage is the interest rate stays the same throughout the term of the loan.

When you select a fixed-rate mortgage, you will need to decide the duration of your mortgage. There are 30-year mortgages as well as 15-year mortgages. Generally, the shorter the time such as on a 15-year mortgage, the higher the payments and the lower the interest rates. Which one you choose, depends on your financial goals.

A 15-year mortgage is great if you can comfortably make the payments and intend to stay in the home for a long time. Let's say your daughter was 3-years old when you purchased your new home on a 15-year mortgage, she is now 18-years old and headed for college. Without mortgage payments and with the equity accumulated in your home, the new financial burden is more easily handled.

On the other hand, perhaps only one of you works outside the home and the other is a stay-at-home mom or dad. Then, depending upon the working spouse's income, payments on a 15 or 20-year mortgage might be too high. If you need more available cash, select a 30-year mortgage. In good times, you can always set aside extra mortgage payments to reduce the principal mortgage and save money on the interest. When doing so, be sure to indicate the payment should be applied toward the principal. This concept is the same as using an equity accelerator without some of the drawbacks associated with that financial option.

Bottomline: A Conventional Fixed-Rate Mortgage is a good choice for most people.

Government Loans - FHA and VA

FHA and VA loans are great for those who qualify, these type loans often require as little as 3 percent down for FHA loans and no money down for VA loans. While government loans are great for anyone looking for a zero to minimum down payment, the downside is government loans also have a reputation for requiring an excessive amount of paperwork and a long approval process time.

Bottomline: Government loans are a great choice but you must have patience.

Mortgage Documents

Once you decide on a type of mortgage, you will need to fill-out a loan application and provide supporting personal and financial documentation (e.g. typical mortgage documents). Your financial situation (e.g., self-employed) and FICO score will determine which documents the lending institution will require.