What’s better, a 15- or 30-year mortgage? Or perhaps an ARM?

Choosing between two loans of the same type, such as two 30-year mortgages, is pretty straightforward. You look at the rates, points and other fees and figure which will be cheapest over the period you expect to have the loan.

But the choice between different types of mortgages is not so simple. On top of the interest-rate differences, each type will behave differently depending on how long you’ll have it. How do you make an apples-to-apples comparison when you’re looking at apples, oranges and pears?

BankingMyWay.com has a battery of mortgage calculators to help with this decision. Two of the most useful are the APR Calculator for Adjustable-Rate Mortgages and the Mortgage APR Calculator for fixed-rate loans.

APR means annual percentage rate. It shows what your interest rate really is with all the fees and points included. 

Here are the APRs and payments the two calculators figure for three recently offered loans, each for $300,000:

• A 15-year fixed loan at 4.75 % from PNC Bank (Stock Quote: PNC), with zero points and $574 in fees. Payment of $2,334, APR 4.779%.
• A 30-year fixed loan at 5.25 percent from Bank of America (Stock Quote: BAC), with 1.75 points and $1,400 in fees. Payment of $1,637, APR 5.447%.
• A 5/1 ARM from Everbank, with a starting rate of 4.25%, with 0.25 points and  $1,093 in fees. Payment of $1,476, APR 3.58%.

So far, the ARM looks like the best deal, offering the lowest payment and APR. The ARM would indeed be the best deal if you expected to have the loan no longer than five years, when the rate would reset.

But if you expect to keep it longer, the APR and payment figures can be deceiving, since you don’t know what interest rate this loan will charge in the future. (See this story about APR and adjustable mortgages.)

You need to play with the figures to see how you might be affected by different rate changes. Many ARMs cap rate changes at 2 percentage points a year, or 6 points over the life of the loan. 

Keep in mind that although the payments are much higher on the 15-year loan, you also would be building equity much faster, because the extra amount goes to paying the loan off in 15 years instead of 30.

With each calculator, press the “View Report” button for a table showing how principal would shrink year by year. APR is a useful tool for making comparisons on an equal footing, so long as you remember its limitations, experiment with various ownership periods and look closely at how fast principal will decline.

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