Money Basics

The home loan

Now that you know more about the homebuying process, consider what you'll need to do to secure a home loan or mortgage. Shop around and compare. Check your local bank or credit union, mortgage brokers, and websites.

Remember that a bank or other lending institution will check your credit history before deciding whether to offer you a loan, as well as the amount of the loan. This loan or mortgage is paid back to the bank on a monthly basis over 20 to 30 years.

A monthly mortgage payment consists of:

• Principal: Repayment of the original amount borrowed
• Interest: The cost of borrowing the principal amount
• Taxes: Real estate taxes
• Insurance: Homeowners insurance

Before approving a mortgage, your lender will also look at the comparative value for similar homes in the area where you are buying in to make sure the loan is a good investment.

Housing prices can vary significantly from location to location. Some loan programs such as Fannie Mae and HUD have strict guidelines as to the condition the house must be in before you buy it. Most loan companies also require things such as termite inspections and roof repairs if needed before approving a home loan.

There are two basic types of mortgages:

• Fixed mortgage: A fixed term—for example, 30 years—and a fixed interest rate at the start of the mortgage; the monthly amount for the payment of principal and interest will not change during the term of the mortgage
• Adjustable mortgage: Also known as an adjustable-rate mortgage (ARM); interest rates are adjusted up or down based on current interest rates set by the federal government; principal and interest payment goes up and down with these rate changes