by Ashley Barnett

Created on: August 18, 2008   Last Updated: August 20, 2008

Owning a home is part of the American dream. Unfortunately, most of us end up financing that dream. Signing those mortgage papers is a sobering experience. You sign and sign and sign a seemingly endless stack of papers, and when you're done you feel like you signed your life away. But you can feel great about the experience if you know you have made the right choices when it comes to that mortgage.

You will feel good about taking on those big house payments if you're confident you can afford them. When you start thinking seriously about buying you should adjust your budget so that you are making pretend payments to yourself. If you expect to have a mortgage payment of $1200 and you're currently renting for $800 a month then put the extra $400 in savings. Don't forget about higher utilities, water, city bills, landscaping, ect. This will give you a chance to see exactly how this new budget will feel, as well as beefing up your down payment. While you are saving up your down payment make sure you pull a credit report and look for errors. This way you will have time to fix any mistakes before you go loan shopping.

In a perfect world you want to put down at least 20%. Anything less and you will have to pay Private Mortgage Insurance (PMI), which increases the cost of your loan. The exact amount you will pay for PMI will vary depending on how close you get to the 20% goal. The more you put down the less your PMI will cost. If you have less than 20% down and want to avoid PMI you can take a home equity loan, which you then use for a down payment on the mortgage. This is called "piggybacking". For example, let's say you are buying a home for $200,000 and have $30,000 to put down. You can avoid PMI by taking a home equity loan for the needed $10,000. You will then have a primary mortgage of $160,000 and an equity loan for $10,000. Run the numbers of each scenario to see which option is best for you.

The interest rate and term are probably of next concern. I highly recommend a fixed rate. We've all seen what can happen when people bank on variable rates. Get a fixed rate with payments you know you can afford and you won't be up at night worrying. Thirty years is the standard term for a mortgage, but think about your age when making a decision. Most people will want to have their home paid off before they retire. So if you have less than 30 working years left, you might want to consider a shorter term.

Don't forget the closing costs. They can vary widely and can really take bite out of your down payment. Ask the person handling your loan what the expected closing costs will be and shop around if you don't like the answer. You don't want any nasty surprises on closing day.

Learn more about this author, Ashley Barnett.
Click here to send this author comments or questions.