by Katerina Nikolas

Created on: October 12, 2010   Last Updated: November 15, 2010

Whatever other financial commitments you make in life, taking out a mortgage is likely to be your biggest one. Buying your first home can be a step onto the property ladder, with the home you buy representing your most significant asset. Understanding how mortgages work and assessing the affordability of home ownership, in advance of applying for a mortgage, can make a crucial difference.

Your mortgage can become a millstone round your neck or a financial product which serves its purpose well. There are some vital steps you should take before you apply for your first mortgage, which will help you to turn your home into an asset rather than a financial liability.

Far too many people have had their dream of home ownership turn sour, primarily by buying more home than they can afford. One of the first things to consider is the total cost of home ownership, rather than just the mortgage payment in isolation. Home owners are liable for property taxes, maintenance and repairs, all utilities, and additional things such as buildings insurance. You need to ensure that your income will cover all these expenses and not borrow so much on a mortgage that income is stretched to capacity.

Understanding what a mortgage loan actually is and how it works, is vital before applying for one. The Federal Reserve released a study showing that the majority of people have no knowledge about the basic fundamentals of their mortgages, even to the extent of failing to understand that a rise in interest rates will affect the cost of the monthly mortgage payment.

Make use of an online mortgage calculator to work out the differences which a few points rise can make in a mortgage payment, and work out if you could afford a monthly payment which rises over time. Never make the assumption that refinancing will be an available option if mortgage payments become too high to service.

Acquaint yourself with the different types of mortgage on offer and their repayment methods. A traditional mortgage which allows for the principal to be repaid along with the interest has proven over time to be the safest model. You will need to consider if you want to take out a variable interest rate mortgage or look for a fixed rate mortgage. If you know your options in advance you are less likely to fall for some fancy sales pitch which sells you an inappropriate mortgage for your needs.

Similarly you should consider the length of term of the mortgage, bearing in mind that the longer the term the more it will

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