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Several federal, state, and local government financing programs are available to homebuyers. The two main federal programs are:

VA Loans. U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with honorable discharges who meet specific eligibility rules, most of which relate to length of service. The VA doesn't make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the amount guaranteed and you in turn will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms with a low down payment. For more information, check the VA's Website at www.va.gov or contact a regional VA office for advice.

FHA Loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), insures loans made to all U.S. citizens, permanent residents, and noncitizens with work permits who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that it requires a low down payment, usually about 3% to 5%. For more information on FHA loan programs, contact a regional office of HUD or check the FHA website at www.hud.gov.

For information on other government loans, contact your state and local housing offices. They often have programs available for first-time homebuyers who are purchasing modestly priced properties. To find your state housing office, check the State and Local Government on the Net Directory at (http://statelocalgov.net. Or, go to your state's home page, where you may find the listing for your state's housing office.

What's the difference between a fixed and adjustable rate mortgage?

With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end.

With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate that is lower than the rate for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years, or "option ARMs" that allow you to choose, on a monthly basis, whether to pay a minimum amount, an interest-only amount, an ordinary principal plus interest amount, or an accelerated payment amount.

How do I find the least costly mortgage? Does it make sense to pay more points for a lower interest rate?

You can save real money if you carefully shop for a mortgage. Everything else being equal, even a one-quarter percentage point difference in interest rates can mean savings of thousands of dollars over the life of a mortgage.

A popular option recently has been "interest-only" loans, which allow you to pay only the interest amount each month -- not any principal -- for the first ten years of the loan. This can lower your initial monthly payments significantly, allowing you to afford more house. Most interest-only loans are adjustable, but it is possible to find fixed rate interest-only loans too.

In addition to comparing interest rates, there are many types of fees -- and fee amounts -- associated with getting a mortgage, including loan application fees, credit check fees, private mortgage insurance (if you're making a low down payment), and points.

Since points comprise the largest part of lender fees, it's important to understand how they work: One point is 1% of the loan principal. Thus, your fee for borrowing $250,000 at two points is $5,000. There is normally a direct relationship between the number of points lenders charge and the interest rates they quote for the same type of mortgage, such as a fixed rate. The more points you pay, the lower your rate of interest, and vice versa.

Comparing Loans by Annual Percentage Rate

One method to compare loans with different points is to use the Annual Percentage Rate (APR), which lenders must disclose to borrowers under federal law. The APR can be misleading, however, as its method of calculating the cost of a loan as a yearly rate assumes that the loan will not be paid off until the loan term ends. While most loans are for 30 years, people generally pay off their loans before the loan term ends because they either move or refinance sooner. Also, different lenders have various ways of calculating costs included in the APR, so that a loan for the same dollar amount and number of points may have different APRs with different lenders.

Before comparing points to interest, factor in how long you plan to own your house. The longer you live in your house (or pay on the mortgage), the better off you'll be paying more points up front in return for a lower interest rate. On the other hand, if you think you'll sell or refinance your house within two or three years, we strongly recommend that you obtain a loan with as few points as possible.

A good loan officer or loan broker can walk you through all options and tradeoffs such as higher fees or points for a lower interest rate. Or you can check a site such as www.homes.com to quickly compare various combinations of interest rates and points.

Ten Strategies for Buying an Affordable House

To find a good house at a comparatively reasonable price, learn about the housing market and what you can afford, make some sensible compromises as to size and amenities, and above all, be patient. Here are some proven strategies to meet these goals:

Buy a fixer-upper cheap (though its getting harder and harder to find ones that don't need major work).
Buy a small house (with remodeling potential) and add on later.
Buy a house at an estate or probate sale.
Buy a house subject to foreclosure (when a homeowner defaults on the mortgage).
Buy a shared equity house, pooling resources with someone other than a spouse or partner.
Rent out a room or two in the house.
Buy a duplex, triplex, or house with an in-law unit that you can rent out for more income.
Lease a house you can't afford now with an option to buy later.
Buy a limited equity house built by a nonprofit organization.
Buy a house at an auction.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

What kinds of government loans are available to homebuyers?

What's the difference between a fixed and adjustable rate mortgage?

How do I find the least costly mortgage? Does it make sense to pay more points for a lower interest rate?