30 Year Fixed Rate Mortgage
This is the safest and most predictable loan available. Your monthly payment is calculated based on the initial interest rate, and your payment never changes for the 30 year life of the loan. The 30 year fixed rate mortgage is considered the most conservative because you are paying the highest possible rate in exchange for the assurance that the rate will never go up.  There is no risk that changing market conditions will affect your monthly payment.

This loan is probably right for you if you don't plan to move or refinance for at least 10 years and you expect interest rates to increase over this period, or if you just feel uncomfortable making an interest-rate bet at this time. This loan may also be right for you if you don't expect your income to increase significantly over the next several years.

15 and 20 Year Fixed Rate Mortgages
Like the 30 year fixed rate mortgage, this program guarantees that your payment never changes over the life of the loan. Since you are committing to pay off your loan over a shorter period, however, your monthly payment will be significantly (about 30%) higher than for the 30 year loan.

This program is for people who can afford the higher monthly payment with the goal of owning the home without debt as soon as possible.  Overall, you will save thousands in interest with this option.

40 Year Fixed Rate Loans
This rate is amortized over a longer period and the payments will be lower, but you will pay a lot more interest over the life of the loan.  For example, on a loan of $600,000 at 6.5%, you would save $280 per month in payments, but would pay $320,000 more in interest if you kept the loan for the full 40 years and didn't make any extra payments.

30 Year Interest Only Loans
This relatively new loan product is becoming very popular.  The rate is fixed for 30 years, but you have the option during the first ten years to pay only interest if you wish.  That reduces the monthly payments by hundreds of dollars.  For example, on a loan of $600,000 at 6.5%, you would save $542 per month with the interest only loan.

After ten years, the loan begins to amortize, and you must pay principal and interest each month over the next 20 years until the balance is paid off.  The result will be much higher payments for the last 20 years if you paid only interest during the first ten.

Example:

$600,000 loan, with no extra principal payments made

30 year interest only payment at 6.50%:  $3,250.

20 year fixed payment at 6.50%: $4,473. 

As you can see, the payment jumps over $1,200 after ten years!  That is significant and may turn out to be unaffordable, unless your income has also risen significantly.

Despite the possibility of a huge payment jump, I like this loan because:

• The rate is guaranteed for 30 years.
  
• You can prevent the worst case scenario by making extra principal payments at any time.
  
• Any extra payments are credited against the principal immediately,  reducing your payment the next month.
  
• The loan gives you flexibility in the payment.  
  
• It's easy to calculate your payment at the end of ten years -- no unpleasant surprises.

See my discussion of interest-only loans for other details.