If you have been investigating the real estate market lately, you will have heard that mortgage rates are very low right now, but what does that mean? What does a mortgage’s rate mean to the borrower?

A mortgage’s interest rate is usually expressed as its annual percentage rate (APR), which is about how many  single dollars per hundred you will pay in interest each year if you make no payments toward the principal. You, as a responsible consumer, will naturally make your mortgage payments, so the interest will be recalculated monthly, but comparing the APR is useful in deciding between similar loans from different lenders.

Different mortgages apply rates in different ways. Fixed-rate mortgages use the same interest rate for the entire term of the loan. This allows the lender to calculate the total amount the borrower will pay by the time the mortgage is paid off, after which the lender can calculate a monthly payment which will remain steady over this entire time.

Variable rate mortgages, also called adjustable rate mortgages (ARMs) do not guarantee the same interest rate throughout the term of the loan. Usually, the interest rate on an adjustable rate mortgage at any given time is based on the interest rate at which the U.S. Federal Reserve lends to financial institutions at that time. Because the interest on these loans is recalculated several times throughout the life of the mortgage, the monthly payment will fluctuate.

When interest rates are high, adjustable rate mortgages are popular because the interest rates will go down as interest rates drop. Often, those who take out these loans intend to wait until interest rates have been reduced, then refinance into a fixed rate loan. When interest rates are low, most people prefer fixed rate mortgages, because they will continue to get the low interest rate after interest rates go up.

Balloon mortgages, or Balloon ARMs, are home loans designed for those who do not plan to remain in a home very long or who expect their household income to increase substantially. These mortgages offer a low fixed rate for a specific amount of time, usually between three and ten years, after which the interest rate will become variable. This means that the monthly payment at the end of the introductory term may be considerably more than the monthly payment at the beginning of the loan.

No matter which type of mortgage you choose, the way the interest rate is calculated should play a prominent role in that decision.