How to Finance a House

Most Americans buy houses by getting mortgage loans from banks. The loan accounts for 80 to 90 percent of the price of the house, while the remaining cost is covered by the buyer's down payment. The homeowner pays back the loan and the interest to the bank through monthly mortgage payments. It is not very safe to get a mortgage loan unless you have a steady income; otherwise, you might default on the loan because of failing to pay the monthly payments.

Select a mortgage that best suits your financial situation. Evaluate the stability of your income. Take into account future expenses, like weddings or your children's education.

Learn the differences between a fixed interest rate and an adjustable rate. A fixed-rate mortgage has an interest rate that never changes and is often issued for a 15- or 30-year period. The monthly payment for a 15-year mortgage will be on average 25 to 30 percent higher than for a 30-year mortgage, but you will get a lower interest rate. With a fixed rate, your monthly payment will be always the same. The problem with fixed-rate mortgage is that you might be stuck with a high interest rate. This problem can be fixed through refinancing.

Understand that an adjustable-rate mortgage has an interest rate that changes over time and depends on the market. Adjustable-rate mortgages initially come with lower interest rates in the first few years. An adjustable-rate mortgage makes sense if you do not plan to keep your mortgage more than 6 to 7 years.

Avoid signing up for an adjustable-rate mortgage with a highest allowed payment that is more than your income. The interest rate could rise very high, and you might lose your house.

Pay attention to the points on fixed-rate mortgages. Points refer to the fees paid up front to the lender at the closing of the loan. One point is 1 percent of the loan. Compare mortgages from different lenders. Do not settle on a specific lender right at the beginning. Large banks often do not offer the lowest rates. Mortgage bankers tend to offer more competitive rates. Get the interest rate quote for each point level. Be careful about no-point mortgage; they tend to have higher interest rates.

Use a mortgage broker to get a good deal. Mortgage brokers tend to take a 0.5 to 1 percent cut on the loan. Check a broker's references to make sure that he is interested in getting you a good deal. Some mortgage brokers might be more interested in getting commissions from lenders than in acting in your best interest.

Increase your approval chances by lowering your debt and clearing up any credit report problem. Make a large down payment if possible. If your down payment is 30 percent or more, it is very likely that your loan application will be approved. If necessary, ask your parent or a friend to be your co-signer to increase the chance of getting approved.