At the most basic level, mortgages come in two categories: fixed rate and adjustable. In both cases "rate" refers to the rate of interest you pay the bank for the privilege of borrowing its cash.
Fixed-Rate Loans
A fixed-rate mortgage doesn't change over the life of the loan, no matter what rates do on the open market. Many people feel more comfortable with a fixed rate, because they know their monthly mortgage payments will remain steady over the years, making at least one aspect of their monthly cash flow predictable. The downside is that you pay for that comfort: Lenders charge a higher rate of interest for fixed-rate loans. Why? Because they figure that if interest rates shoot up, they lose the opportunity to make more money on the funds they are lending you.

Adjustable-rate loans (a.k.a. ARMs) get their name because the rate you pay changes according to a set formula as interest rates fluctuate on the open market. As noted above, the upside is that lenders charge a lower rate for such loans because you are taking on some of the interest-rate risk. This makes your monthly payments lower -- at least in the beginning. Such loans provide a way for many buyers to afford a larger loan amount for a given monthly payment. An adjustable works out wonderfully if rates drop -- something you should never count on. But watch out if interest rates rise. In a year or two, your payments could far exceed what you would have paid for a 30-year fixed. The trick with adjustables is to tailor the loan to your needs.