As you can see, there are many mortgage options (and this chapter has barely touched the surface), so it's important to understand how each of the basic types would impact your payments. Read. Shop around. Ask questions.

Don't underestimate the impact of interest rates on your monthly payments. A $100,000 loan at 7 percent interest for 30 years would cost $665 per month. The same loan at 8 percent interest would cost $734 per month, a difference of $69 per month or $24,840 over the life of a 30-year mortgage.

For most people, a standard 30-year mortgage is a good choice. You'll know what to expect each month, and you're not taking any wild risks. If you really want to save on interest costs, you can go for the 15-year mortgage. The interest-only option and any loan with negative amortization are much more complicated.

You should use these riskier loans only if you know what you're getting into. If you have an investment plan that's more attractive than building equity in your home, the interest-only route can make sense. Of course, you have to actually implement and stick to your alternative investment plan — otherwise you'll end up with nothing.

Negative amortization loans (sometimes found in “option ARM” programs) are extremely dangerous. They might make sense for a sophisticated investor who is trying to manage cash flow, but you don't want the loan balance to increase on a home you are actually living in. These loans have historically been pushed on buyers who want to purchase more home than they can afford. You may be able to make the monthly payments today, but be prepared for a disastrous shock down the road.

Federal Truth in Lending Act and the APR

The Federal Truth in Lending Act requires lenders to disclose the annual percentage rate (APR) and the total finance charges to borrowers in writing. The APR is the average annual finance charge. It's more meaningful than the interest rate alone because it includes costs such as loan origination fees, private mortgage insurance premium, points, and so on.

You can't just assume that the loan with the lower interest rate is best. The APR levels the playing field by allowing you to quickly and painlessly compare loans that have different rates and fees. It's a much more accurate indicator of the cost of the loan. Be aware, however, that it can't be used as an accurate comparison of borrowing costs on adjustable-rate mortgages.

Paying Points

Points are a percentage of the loan amount that you pay up-front to “buy down” the interest rate on a mortgage. One point is 1 percent of the loan and usually lowers the interest rate by ¼ percent. One point on a $100,000 loan would be $1,000, two points would be $2,000, and so on. When comparing interest rates, you have to consider points. A 7 percent loan with one point is not necessarily better (or worse) than an 8 percent loan with no points.

Remember, you have to look at the APR to compare rates and fees. Paying points in order to get a lower interest rate may be worthwhile if you're planning to stay in the house for five years or more. The lower interest rate saves you a lot of money over the long term, but if you sell in less than five to ten years you won't have time to recoup your costs.