A mortgage represents a loan or lien on a property/house that has to be paid over a specified period of time. Think of it as your personal guarantee that you'll repay the money you've borrowed to buy your home. Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Make sure you select the mortgage that is right for you, your future plans, and your financial picture.

What is an amortization schedule?

The month-by-month allocation of your monthly payment to the loan's interest and principal is called an amortization schedule. With most loans you pay off the interest on the loan before you pay off the principal (or the actual amount you borrowed). Your lender will provide an amortization schedule to show you how the percentage of your principal paid off increases with every payment, while the percentage of interest decreases.

Choosing the right mortgage.

Once you decide on the mortgage you want, do your homework. Different lenders offer different rates, points, and fees. Ask around and compare.

Understanding the benefits of different mortgage offerings can be a complex process. How do you figure it all out?

Fixed-rate mortgages are the most common mortgage for many homebuyers because the monthly payments are stable. The interest rate you lock-in will be the same interest rate you pay for the life of the loan - whether it's a 15-year or 30-year mortgage .

What are the benefits of a fixed-rate mortgage?

• Inflation protection.
  If interest rates increase, your mortgage and your mortgage payment won't be significantly affected. Even if your taxes or insurance costs go up over time, your basic loan payment (principal and interest) will stay the same. This is especially helpful if you plan to own your home for five or more years.

• Long-term planning.
  You know what your monthly housing expense will be for the entire term of your mortgage. This can help you plan for other expenses and set long-term financial goals for yourself and your family.

• Low risk.
  You always know what your payment will be, regardless of what current interest rates are. This is why fixed-rate mortgages are so popular with first-time buyers.

There are additional considerations to be aware of with fixed-rate mortgages:

• Your mortgage interest rate won't go down, even if interest rates drop, unless you refinance your mortgage.
• Because the interest rate is generally higher than other types of mortgage loans, you may not be able to qualify for as large a loan with a fixed-rate mortgage.
• Your total monthly payment can occasionally increase based on changes to your taxes and insurance. In many cases you pay these costs through an escrow account that your lender keeps for you.

Adjustable-rate mortgages (ARMs) are popular because they usually start with a lower interest rate and a lower monthly payment. The lower rate (and lower monthly payments) may also allow a higher loan amount. However, the interest rate can change during the life of the loan, which would mean that your monthly payment would increase (or decrease).

It's important to understand the specifics of an adjustable-rate mortgage, commonly called an ARM:

• Adjustment periods.
  All ARMs have adjustment periods that determine when and how often the interest rate can change. There is an initial fixed-rate period during which the interest rate doesn't change - this period can range from as little as 1 month to as long as 10 years. After the initial period, the interest rate will often adjust each year. For example, with a 3/1 ARM, your interest remains the same during the first 3 years, and then can adjust every year following, up to a maximum amount (the "lifetime cap").

• Caps, ceilings, and floors.
  All ARMs have rate caps, also known as ceilings and floors. Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of the loan. Most ARMs have a lifetime cap that limits the amount your interest rate can increase over the life of your mortgage.

• The number system.
  There are several types of ARMs, such as the 10/1, 7/1, 5/1 and 3/1. The first number (10 for example) is the length of the initial period, during which the interest rate can't change. The second number (1 for example) is how often the ARM is adjusted after the initial period. So, a 10/1 ARM won't change for the first 10 years, but can change in the 11th year and again every year after that. Depending on the initial cap the change could be as high as 5 percentage points above what it was before.

There are additional considerations to be aware of with adjustable-rate mortgages:

• Because the initial interest rate is usually lower than a fixed-rate mortgage, your initial payments will be lower and you may qualify for a larger mortgage amount.
• If interest rates are high when you get your mortgage but drop during any adjustment period, your monthly payment may decrease.
• An ARM with a low initial interest rate and an initial adjustment period after 5 or 7 years can save you money.
• ARMs can, and often do, have interest rate increases at adjustment periods. You may have an increase in your monthly mortgage payment after each adjustment period. The amount your mortgage might increase would depend on the periodic cap (how much of an increase is allowed each year), the lifetime cap (the maximum interest rate or maximum number of increases allowed), and the size of your mortgage's margin. If the life cap is 5%, the maximum interest rate adjustment would be to 10.75%

Next: Selecting a Mortgage