Types

• Depending on your situation, you can choose the loan program that fits your finances. A fixed-rate mortgage will keep the same interest rate for the life of the loan. When rates are low, locking in for 15 or 30 years is attractive. However, if the rates are high, it may be in your best interest to go with an adjustable rate mortgage (ARM) and take advantage of possible lower payments in the future. But you have to be prepared for a higher rate as well. Some loans have the best of both worlds, with a low fixed rate for a number of years, such as five or seven, and then an adjustable rate after that time. Sometimes, these two-step mortgages can cause problems if the introductory rate is too low to repay a portion of the interest accrued. When the rate adjusts, your payment can increase so much to repay the balance and the interest that you may not be able to afford the house.
  
  

Costs and Fees

• Your mortgage will come with costs and fees. Normally, you will pay for these out-of-pocket at the close of the sale. However, some programs allow you to wrap them into the balance of the loan so that you pay them off slowly over time, as you accrue interest on the amount. Either way, the costs and fees can add up. There are application, origination, discount and appraisal fees, to name a few. These can be different, depending on the lender and program that you choose. Figuring out which loan is best can be confusing, so the U.S. Congress passed the Truth in Lending Act, which requires the lender to give you a good-faith estimate that breaks down the costs of the loans so you can compare them. A quick way to determine if there are excessive charges is to ask for the Annual Percentage Rate, or APR. This is the interest rate plus a calculation for the loan costs. The closer the APR is to the interest rate on the loan, the less you are paying in mortgage fees.
  
  

PMI

• In addition to your principal, interest, property taxes and insurance, some payments include the premium for private mortgage insurance, or PMI. If you place less than 20 percent down on your loan, you will pay PMI because you are seen as a higher risk than someone who would invest more into the property. PMI does not protect you or pay you benefits. It is purely for the mortgage lender, who is paid by the carrier if you default on the loan. However, it serves the purpose of getting you into a home that you otherwise may not be able to buy. Once your loan-to-value ratio reaches at least 80 percent, you can ask the lender to remove the PMI charges from your monthly payment.
  
  

FHA

• The Federal Housing Administration (FHA) insures mortgages for home buyers with qualifying standards that make it possible to purchase a property with less money down and a higher loan-to-income ratio. As of 2010, you can place as little as 3.5 percent down and typically have a credit score in the mid-600s. You must live in the home, and each region of the United States has a maximum FHA loan amount that you can borrow. You also will be charged approximately 1 percent of the loan in PMI fees.