See How Adjustable Rates Affect Your Monthly Mortgage Payment

Finding Suitable Homes in Your Price Range

Presuming you do not have a very large supply of cash on hand, you will have to finance your home with a mortgage. A mortgage loan is essentially a secured loan that uses the home as collateral. Mortgages are typically paid in monthly installments over several years - usually 15 or 30 (40-year mortgages do exist, but they are not offered by every lender).

Mortgages contain two distinct parts:

• Principal. The amount you need to borrow to pay for your home and closing costs.
• Interest. What you pay the financial institution for the use of its money.

How Much Can I Afford to Pay for a House?

How much does a home cost? Before you get too comfortable with the asking price in the real estate ad, you should be aware of all the expenses you will be expected to pay.

First, there is the price of the home itself. The seller offers his or her house for sale at the asking price. This price may be negotiable depending upon the condition of the home and other factors. After the negotiations are done, the agreed-upon price becomes the cost of the home. To secure this cost, the buyer is expected to make a non-refundable payment to the seller. This is called earnest money. This amount will be deducted from the amounts paid when the sale is completed.

6 Inexpensive Ways to Get Your House Ready to Sell

You may want to convert an adjustable-rate mortgage (ARM) to a fixed-rate loan to gain stability in your monthly payments or in the event that interest rates drop faster than your ARM can accommodate. Many ARMs have caps limiting the amount of periodic adjustments. So, if interest rates drop 3 percentage points in a year but your ARM has a 2 percent annual cap, you may want to refinance to take full advantage of the new, low interest rates.

When interest rates drop, you can refinance to take advantage of the new rates, getting either a new ARM or a fixed-rate mortgage at a lower rate. When you replace an old ARM with a new one, you generally reset your mortgage's lifetime adjustment cap. For instance, if your old mortgage had a lifetime adjustment cap of 6 percent and the initial rate was 10 percent, your mortgage rate could go as high as 16 percent. If you replace your old mortgage with an ARM with a rate of 8 percent and a lifetime adjustment cap of 6 percent, your mortgage interest rate will never go higher than 14 percent.