Mortgage Basics

When shopping for a house, it's crucial to understand your financing options early on, both in terms of types of loans and mortgage lenders, so that you can find the most cost-effective mortgage.

Many entities, including banks, credit unions, savings and loans, insurance companies and mortgage bankers make home loans. Lenders and terms change frequently as new companies appear, old ones merge and market conditions fluctuate. To get the best deal, compare loans and fees with at least a half a dozen lenders. Because many types of home loans are standardized to comply with rules established by the Federal National Mortgage Association and other quasi-governmental corporations that purchase loans from lenders, comparison shopping is not difficult. Be sure to ask for the same size, type, and length of mortgage -- such as a 30-year fixed term mortgage for $300,000 -- so you're comparing apples to apples.

Be sure to check out government-subsidized mortgages, which have no down payment and low down payment plans. Also, ask banks and other private lenders about any "first-time buyer" programs that offer low down payment plans and flexible qualifying guidelines to low- and moderate-income buyers with good credit.

Finally, don't forget private sources of mortgage money -- parents, other relatives, friends or even the seller of the house you want to buy. Borrowing money privately is usually the most cost-efficient mortgage of all.

What makes a mortgage payment
A mortgage payment is broken into four basic parts:

Principal- The amount of money paid that actually is applied to paying off the loan

Interest- The amount of profit the lender yields in borrowing the money to the customer

Taxes- The amount of money that is applied to the property tax owed on the property

Insurance- Divided into two parts, Hazard insurance and mortgage insurance. Hazard insurance protects the customer should anything hazardous happens to the property. Mortgage insurance is sometimes charged on any loan that is over 80% of the value of the property. Mortgage insurance protects the lender should the customer be unable to make his mortgage payment