Owing your own home is the "American Dream". But to achieve it, you've got a lot of details to work through, especially if you are a first-time buyer. The FAQs below will help.

• How are escrow payments calculated?
• Which mortgage is best for me?
• How can I find a good real estate agent when buying a home?
• Can I save money by buying a home without a real estate agent?
• How can I negotiate the lowest price when buying a home?
• Should I have the home I want to buy inspected?
• What should I watch out for when dealing with home contractors?
• How much should I expect to pay in closing costs?
• Should I buy or rent?
• How can I lock in a mortgage most effectively?
• How can I minimize the problems in getting a mortgage?
• How can I avoid paying Private Mortgage Insurance (PMI)?
• What are the different options for mortgages?
• How do I choose between low rates and low points on a mortgage?
• How much should I spend on my next home?

An escrow account is a fund that your lender establishes in order to pay property taxes and hazard insurance as they become due on your home during the year. The lender uses the escrow account to guard its investment in your home. Similarly, if you neglected to pay the hazard insurance premium, a fire or flood that destroyed your home also would destroy the lender's security for the loan.

The goal of the escrow account is to have enough money to pay taxes and insurance when they become due. To achieve this, the lender adds one-twelfth of the tax and insurance amount to your mortgage payment each month. For example, if your taxes and insurance are $1,200 per year, the lender would collect $1,200 in twelve installments of $100 per month.

To cover possible tax or insurance increases, the federal Real Estate Settlement Procedures Act (RESPA) permits the lender to add to the yearly amount two months of extra payments prorated monthly. So, the lender would collect an additional $200 divided by 12, or $16.67 per month, for a total escrow payment of $116.67 per month.

To determine if you are being charged correctly, compare your escrow payments with what you owe annually on your hazard insurance and property taxes. You can get this information from your local tax authority and your insurance company. If the lender charges you substantially less than the required amount, you will need to pay an additional lump sum at the end of the year. If the lender charges you substantially more, it may tie up your money unfairly, as well as violate the RESPA regulations.

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It may depend on how much risk you can tolerate. A traditional 30-year, fixed-rate mortgage is still the safest way to go. Your monthly payment will stay the same for the life of the loan. You are protected from rises in interest rates, and if rates go lower, you can always refinance.

An adjustable rate mortgage, or ARM, is riskier but often less costly. ARMs typically offer below-market teaser rates and then adjust according to current interest rates as often as every few months. These loans set caps on the interest rate and the amount it can ratchet up each period. Be careful of loans that have payment caps because they can leave you owing more money on your mortgage each time you make a payment if interest rates rise quickly. ARMs are best for people who need initially lower monthly payments, who expect their income to rise, or who expect to live in their home for five years or less.

Mortgages with 30-year terms are still the most popular although 15-year mortgages are gaining favor among people who want to build equity faster at a lower cost. Many homeowners with 30-year mortgages, however, can also lower their costs and shorten the term of their loans by paying extra each month.

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If you find that your real estate agent is not doing his or her best to find you the home you want, is not listening to you, or is otherwise not meeting your expectations, don’t hesitate to make a change. The real estate agent will cost you money, so make sure you are getting your money’s worth. You want an agent who is competent and experienced, and whose way of working is compatible with your own.

To find an agent, look for the following traits:

• Is the agent full-time? Is the agent experienced?
  Be sure the agent has been doing the type of work you will need him or her to do for at least a few years.
• Does the agent listen and communicate clearly?
  The agent must be able to learn what’s important to you in your home purchase, and to tell you what you need to know about a home.
• Is the agent willing to negotiate for you?
  To get the best home for your dollar you’ll have to negotiate with the seller on the price. If the agent is not willing to show you houses that are 20% over your price range, or to go to bat for you when negotiating with the seller, you need to find a new agent.
• Is the agent careful in his or her work?
  You need an agent who will cover all the details that go into buying a home.

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You can shop for and buy a home without an agent, but you’ll need to put in a lot of extra time to do the things that agents do: search for properties, schedule appointments to see them, coordinate inspections, and negotiate. Home buyers who already have a property in mind that they want to buy are the best candidates to do the deal without an agent.

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Here are some negotiating tips:

• Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
• Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate
• Know what comparable homes are selling for.
• When the seller won’t budge on price, try to negotiate something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
• Don’t forget the real estate agent’s commission. This is negotiable, too.

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The standard home inspector’s report will include an evaluation of the condition of the home's heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure. The purchase of a home is probably the largest single investment you will ever make. You should learn as much as you can about the condition of the property and the need for any major repairs before you buy.

The inspection fee for a typical one-family house varies geographically, as does the cost of housing. Similarly, within a given area, the inspection fee may vary depending upon the size of the house, particular features of the house, its age, and possible additional services, such as septic, well, or radon testing. The knowledge gained from an inspection is well worth the cost. The inspector's qualifications, including his experience, training, and professional affiliations, should be the most important consideration.

Since there are no licensing requirements for home inspectors (except in Texas), make certain that such an association has a set of nationally recognized practice standards and a code of ethics. This provides members with professional inspection guidelines, and prohibits them from engaging in any conflict of interest activities.

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Make sure you will get back the cost of the project on the sale of your home. It’s often the case that much of the renovation cost cannot be added to the home’s price. Make sure the remodeling you’re doing is something that the average home buyer wants, such as a modern kitchen, larger closets, and modernized or additional bathrooms. An improvement in electrical wiring is also usually a plus. Further, use neutral colors and designs that fit the rest of your home—so that home buyers will not be turned off.

Do not pay the contractor too much money up front.
Before you sign a contract, work out a detailed contract that includes a target date for finishing various portions of the job, and a payment schedule. The contract should detail the costs of materials and labor, so that you know what the contractor’s profit will be. The final payment should be due on completion, and it should be a fairly large chunk.

Don’t contract with someone who’s not bonded, licensed, and insured.
To find out whether a contractor is licensed, you can contact either a state licensing agency. Or, you can check with a consumer protection agency to find out whether complaints have been filed against a contractor. To find out about insurance, ask to see a copy of an insurance policy.

Ask for as much detail as possible from the contractor about what the job will entail.
You never know what you’ll find when you rip open that 30-year-old wall or start replacing that electrical wiring. On a big project, hire an independent engineer to inspect the work. If you don’t, you could regret it later if the work has to be redone at your expense because it’s not up to code.

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Closing costs can range from 3 percent to 8 percent of the mortgage, or $3,000 to $8,000 on a $100,000 loan. One of the largest closing costs is likely to be the origination fee, which is typically 1 percent of the mortgage. You may also pay from 1 to 3 points, or 1 percent to 3 percent in up-front interest. If you put less than 20 percent down, you will need private mortgage insurance. That will cost you a one-time fee of up to 1 point in addition to monthly payments. Other closing costs include an application fee, appraisal, survey, credit check, title search and insurance, transfer taxes, and homeowners' insurance for one year.

Your lender must send you an estimate of your closing costs shortly after receiving your application. Your realtor, lawyer, or escrow agent will give you the exact amount before closing. If you have only enough cash for a down payment, you can fold closing costs into your mortgage, but you will have to pay a higher interest rate.

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For most people, owning a home makes more sense than renting one. Homeowners build equity over time and reap the benefits of writing off mortgage interest on their taxes. A modest increase in value represents an even greater gain for people who make a typical down payment of 20 percent or less. The higher your income tax bracket, the better your return.

You may want to rent, however, if you can find cheap housing, such as a rent-controlled apartment. If you are young and single, newly divorced, or move often with your job, renting may make more sense. It's tough to recover the costs of buying a home within the first few years. Retirees also may want to sell the family homestead and invest the proceeds. Renting may be a good idea for anyone living in an area where housing prices are falling. Then you can wait until the market bottoms out before you buy.

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A lock-in, also called a rate-lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. A lock-in that is given when you apply for a loan may be useful because it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application.

During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. Remember that a locked-in rate could also prevent you from taking advantage of price decreases, unless your lender is willing to lock in a lower rate that becomes available during this period.

When considering a lock-in, you should ask these questions.

• Does the lender offer a lock-in of the interest rate and points?
• When will the lender let you lock in the interest rate and points?
• Will the lock-in be in writing?
• Does the lender charge a fee to lock in your interest rate?
• Does the fee increase for longer lock-in periods?
• If so, how much? If you have locked in a rate, and the lender's rate drops, can you lock in at the lower rate?
• Does the lender charge you an additional fee to lock in the lower rate?
• Can you float your interest rate and points for now and lock them in later?
• What rate will be charged if the lock-in expires before settlement-the rate in effect when the lock-in expires?
• If you don't settle within the lock-in period, will the lender refund some or all of your application or lock-in fees if you decide to cancel the loan application?

If your lock-in expires and you want to get another lock-in at the rate in effect at the time of the expiration, will the lender charge an additional fee for the second lock-in?

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Try to find out what documentation the lender will require from you. Much of the information required by your lender can be brought with you when you apply for a loan.

When you first meet with your lender, be sure to bring the following documents:

• The purchase contract for the house
• Your bank account numbers, the address of your bank branch and your latest bank statement, plus pay stubs, W-2 forms, or other proof of employment and salary.
• If you are self-employed, balance sheets and tax returns for 2-3 previous years.
• Information about debts, including loan and credit card account numbers and the names and addresses of your creditors.
• Evidence of your mortgage or rental payments, such as canceled checks.
• ertificate of Eligibility from the Veterans Administration if you want a VA-guaranteed loan.
• Ask the lender what has been their average time for processing loans recently and whether the lender's loan volume has increased.

Those who are rejected for a mortgage may be rejected because of a "credit score." To improve your credit score a few months before applying for a mortgage, pay down your credit cards; obtain a copy of your credit report so as to be able to dispute any errors; keep only a few credit cards, and do not apply for credit unless you really need it; start paying bills punctually (if you do not already do so)—your recent history is counted heavily; if you haven’t borrowed enough, take out a small loan or obtain a credit or charge card to beef up your credit history; and try not to change jobs.

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Lenders usually require private mortgage insurance if the loan is more than 80 percent of the home's purchase price. Even if you don't have the standard 20 percent down-payment, you can avoid paying private mortgage insurance in other ways. Some buyers go for 80-10-10 financing, which means that they put 10 percent down and take out a first mortgage for 80 percent of the purchase price. Sellers sometimes will carry a 10 percent second mortgage. Otherwise, you can finance the remainder through institutional lenders, which often charge a point above the first mortgage's rate.

If you only have 5 percent to put down, you may still be able to do the deal. You will pay a much higher interest rate on a 15 percent second mortgage, however.

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There are two basic kinds of mortgages: fixed-rate and adjustable. Fixed-rate mortgages carry the lowest risk and are an especially good deal when interest rates are low. Adjustable-rate mortgages typically cost less, but they can become expensive if interest rates rise substantially. Some of them also amortize negatively, which means that your payment does not cover all the loan's interest for the month. Your balance will increase, and you will owe interest on the interest. You can get either loan for different terms, typically 15 or 30 years.

There are now many different kinds of mortgages that combine aspects of both fixed-rate and adjustable loans. A mortgage may start as a fixed-rate loan, for example, and then convert to an adjustable after several years. One loan that has been around a long time is a balloon. It has low, fixed payments for a period of years, and then the entire loan comes due. Considered very risky, it is sometimes used by a seller to help a buyer with the down payment. Banks now offer balloons that can convert to fixed-rate or adjustable mortgages.

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You will save money by paying points and getting a lower interest rate if you intend to live in your house for a long time. Points are an up-front interest fee that generally increases as the mortgage interest rate decreases. Trading this fee for a higher interest rate will cost more over the life of the loan.

If you plan to be in your house for less than five years, however, it is cheaper to avoid paying points by taking a higher interest rate. You also might want to take the higher interest rate if it means you can then put enough cash down to avoid private mortgage insurance.

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Before deciding on the price range of the home you’re going to buy, think about how much you want to pay out each month in mortgage payments. Try to save as large a down payment as possible. The mortgage payment will be composed of the mortgage payment, the property taxes (in most cases), and the mortgage insurance. The lender will set a maximum on how much you can borrow. Use the maximum as a starting point to deciding how much you’ll borrow. Ask a real estate agent to help you get "pre-qualified" by a lender (to get an estimate of the maximum mortgage amount).

Lenders will be happy to "pre-qualify" you—give you a preliminary limit on the amount they would be willing to lend you. This pre-qualification is not a commitment on the lender’s part, but the maximum they provide you with is helpful to the buyer for planning purposes. Once you’ve set a price range for your new home, give it to the real estate agent during your first visits. Don’t be afraid to look at homes that are 15% to 20% over your price range. You will be able to negotiate the price down in many cases.

You will want to save as much of the down payment as possible. The reasons for this are two-fold: first, lenders will not require you to pay for private mortgage insurance if you can come up with a 20% down payment; second, the sooner you pay off your mortgage, the better off you are financially.

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