The most important aspect of your home purchase is the mortgage you obtain. The amount of this mortgage loan will be decided by the price of the home and your down payment.
Generally, the amount of your down payment and income/debts control the price range of homes you can preview and consider buying, and hence, the size of loan needed for purchase.
A lender will analyze your income and debt ratios to determine your ability to repay the loan. Generally, you can afford a loan that is 25-33% of your gross monthly income.
The interest rate and the amount of the mortgage will determine the amount of your monthly payments. Higher interest rates will yield higher monthly payments. The term of most real estate loans is 15 or 30 years. Loans fall into two categories: (1) those that have a fixed interest rate and payment; and (2) those with an adjustable interest rate and payment.
A Fixed Rate Mortgage provides a known monthly payment that will remain the same throughout the life of the loan. This means your house payment will never change and is easier to budget. The interest rates on these loans are usually slightly higher than adjustable loan rates since the lender is establishing a set interest rate for a number of years.
Adjustable Rate Mortgage (ARM) loans generally give you the benefit of low initial interest rates, and a corresponding lower monthly payment at the beginning of the loan term. The interest rates can increase ( or even decrease) as the loan adjusts for periodic changes in bank interest rates. An important point to look for is the presence, or absence, of an interest-rate "cap." Life-of-the-loan caps place a ceiling on how high the rate can increase over the term of the loan, in some cases it can be five to six percentage points above the original rate. "Caps" are a guarantee from the lender that you will not be required to pay more than a specific maximum interest rate. Annual "caps" protect you from extreme changes in the interest rate in any given year, and usually these changes are in the one to two percent range.
Shop around for your loan. Don't be afraid to ask questions and to compare one loan to another. Since you will be living with the mortgage for many years, make sure to get the best interest rate for your financial circumstances.
>> Next: The Downpayment