While it has become somewhat cliché, it cannot be understated that buying a home is probably the most important - and in most cases the largest - financial move that a person will make in their lifetime. Having said that, it is no wonder that finding the right mortgages, especially for first time buyers, can be overwhelming.

Many banks might want to simplify it for you, having you view this enormous loan in terms as simple as a monthly payment. But not having an understanding of how your mortgage works, and especially how your interest is calculated, can end up costing you tens of thousands of dollars - or more.

Down payment

First things first, if you are planning to enter the housing market, or thinking about moving up the housing ladder, then you probably know you're going to need a sizable down payment. Next to the size of monthly payment you can afford, your down payment is the single biggest contributing factor in determining the size of mortgage you will be approved for.

Most lenders require that you can pay 20% of the value of the home up front. Assuming a sale price of $226,000 (the median US home price in January 2013), the required down payment would be $45,200. If you are a new buyer, this amount may seem out of reach. Luckily, many banks will sell you a mortgage for as little as five or zero percent down payment.

In order to qualify for low down payment mortgages, the potential home owner will need mortgage insurance. Mortgage insurance guarantees the bank will receive repayment even if the borrower defaults on the mortgage. Private mortgage insurance typically runs between 0.5% and one percent of the financed amount of the home, annually. Again, assuming a $226,000 home at one percent, mortgage insurance will cost roughly $2260 per year, or close to $190 a month.

Interest rates and amortization

The interest rate on your mortgage will be the biggest contributor to your monthly payment. Based on a 25 year amortization and a $236,000 house, a seven percent interest rate will give you a monthly payment of $1652.99. Cut the rate to four percent and you will be paying $1241.41 per month. That is a difference of nearly $5000 per year.

With today's historically low interest rates, you could be paying as little as 2.5%, so it is vital that you shop around and negotiate for the best interest rate possible. The following factors are going to determine how attractive your rate will be:

  • Your credit score.
  • Your current debt load.
  • Your income.
  • Your down payment.

Amortization is another factor that will contribute to your monthly payment. Amortization means the amount of time your loan repayment schedule is spread out over. A 30 year amortization period will mean significantly lower payments than a 20 year period. But, with a longer amortization period, you will end up spending much more on interest in the long run.

These mortgage variables will influence how much you pay for a house, regardless of the sale price of the home. There are m any useful mortgage calculators available online; take advantage of them and negotiate the best mortgage that works for you.

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