The single most important aspect of your home purchase is the loan, or mortgage, you obtain. The amount of this 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 look for, and hence, the size of the loan you will need.
A lender will analyze your income to determine your ability to repay the loan. A general rule of thumb to calculate how much loan payment you can handle is to figure 25-33 percent of your gross, pre-tax monthly income.
The interest rate and the principle amount of the mortgage will determine the amount of your monthly payments. The higher the interest rate, the higher the monthly payments. The length of most real estate loans is generally 15 or 30 years. Loans fall into two basic categories: (1) those that have fixed interest rates and payments; and (2) those with interest rates and payments that vary over time.
A Fixed Rate Mortgage provides a known monthly payment that will remain the same throughout the life of the loan. This means housing costs will never vary and will be easy on the budget. The interest rates on these loans are usually a little bit higher than on adjustable loans since the lender is establishing a set interest for a number of years.
Adjustable Rate Mortgage (ARM) loans generally give the benefit of low initial interest rates and a corresponding lower monthly payment at the beginning of the loan term. The rates increase (or may even decrease) as the loan provides for periodic changes in interest rates. An important point to look for is the presence or absence of interest rate "caps." Life-of-the-loan caps place a ceiling on how high the rate can go over the term of the loan, often five to six percentage points above the original rate. They are a guarantee from the lender that you will not be required to pay more than the agreed-upon maximum interest rate. Annual caps protect you from extreme jumps in the interest rate in any given year and are usually 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 it for many years, make sure to get the one best suited to fit your financial circumstances.
