Buying a home is both a solid investment strategy and a way to gain stability and enjoyment, but it involves a lot of money and a time commitment. As such, it's wise to make the decision based on meaningful criteria. Begin with a list of what you most want from the home and community in which you will live, as follows:

• Size: How many bedrooms and bathrooms do you need?

• Style: Are you willing to live in a condominium or mobile home?

• Essentials: Storage space and hot tubs can be essential to some.

• Schools: Visit and investigate the schools your children will attend.

• Transportation: How long will it take you to commute to work? Is there a garage or only street parking? Do you have access to public transportation?

• Safety: Is the neighborhood safe for your children?

• Amenities: Are there local restaurants, theaters, and other activity centers to entertain your family?

• Neighbors: How does the neighborhood look from the street? Your neighbors' slovenliness will diminish the value of your home.

In terms of investment potential, location of the property may be the most important determination. Well-maintained, desirable neighborhoods are worth their weight in gold.

Of course you want to buy a house you love, but a money-savvy woman also wants to protect her long-term investment. Many have made minor fortunes by purchasing the smallest or most run-down house in the best neighborhood. You don't want to buy a house that requires so many repairs it zaps your budget, but you do want to consider the long-term marketability and buy a property that you can afford and that will appreciate in value.

Preapproval

Many people consult with a mortgage lender, who gives them an estimate on what she believes the buyer can afford. This is helpful to you, but if you are ready to buy, going from prequalification to preapproval is advisable. Here's the basic difference:

• Prequalification is an estimate a lender calculates based upon simple data you supply about your income, debt, and debt payments about how much you can borrow.

• Preapproval is a lender's promise to provide a loan up to a certain amount. Lenders collect and then verify information about your income, debt, and debt payment claims to determine the amount they are willing to loan you for a home purchase.

Preapproval frees you to find a house and negotiate on the strength of the lender's financial backing. It tells the seller's broker and the home seller that you are serious and capable of closing the deal. In competitive markets, the preapproved buyer has a decided advantage. At closing, the lender will probably verify that your income and debt information hasn't changed. The lender will also ask for an appraisal to make sure the property is being purchased for a reasonable amount before the loan is consummated.

Small savings on a large mortgage can add up quickly. Seek out a “lowest-cost bid” for your mortgage through multiple lenders, including your bank and local credit unions that may offer lower-than-average rates. Ask your real estate broker for suggestions, but keep in mind that she may favor lenders for reasons other than reliable low-cost loans.

At least three months before you seek preapproval for a mortgage loan, check your credit reports to see if there are any blemishes or mistakes. Make any corrections and clear up anything that will lower your credit score.

Lenders evaluate your monthly income, the stability of your monthly income, your monthly debt payments, your assets, and your credit history to determine the maximum amount they are willing to lend you for a particular home. Lenders have their own method for computing how much they will loan to you.

If you have worked for your current employer for a few years and have a solid credit history, they will probably go as high as 29 percent of your pretax income for mortgage, insurance, and property taxes. However, it's important for you to do your own calculations and decide what you feel you can afford.

Down Payments

For standard home loans, you may be required to invest 10 to 20 percent of the home's value as a down payment to avoid paying private mortgage insurance. However, if you borrow using mortgages backed by the Federal Housing Administration (FHA) or Veterans' Affairs (VA), you may be able to pay 5 percent, or less, of the home's value in a down payment. The FHA or VA may also help lower your mortgage costs.

VA-insured loans are generally offered only to current and past U.S. military personnel who are currently serving, or who served and were not dishonorably discharged from 24 months of active duty, including 90 days of service in wartime or 181 days in peacetime. National Guard and Selected Reserves members with at least six years of service are also eligible for VA loans, as are unmarried spouses of veterans who died while in service. The VA will insure loans up to $203,000 and may not require any down payment.

Private Mortgage Insurance

Generally, if you invest less than 20 percent of the home's value in a down payment, you will be required to buy private mortgage insurance (PMI). This can cost as much as $500 per year for every $100,000 of mortgage value to insure the lender against your defaulting on the loan. PMI is automatically cancelled when the amount of your outstanding mortgage falls below 78 percent of the home's purchase value; however, you can contact the mortgage lender when your balance is below 80 percent of the home's purchase value to terminate PMI early.

You may be able to get around PMI requirements by taking out an 80-1010 loan, in which you pay 10 percent of the home's value, take out a higher-interest loan for 10 percent, and then seek a traditional mortgage without PMI for the remaining 80 percent. This may save you money by eliminating years of PMI payments.

Your Mortgage Options

Lenders typically offer home mortgages that are either 15 or 30 years with fixed or adjustable interest rates. But the length is negotiable and should be chosen based upon your ability to meet the monthly payments — the shorter the better.

Fixed mortgages lock in an interest rate for the life of the loan, which means your monthly payment will not fluctuate. Adjustable-rate mortgages (ARMs) offer low fixed initial rates that are adjusted upward after a few years. After the first adjustment, increases are limited to an annual “periodic cap” until they reach a specified “lifetime cap.” ARMs offer lower mortgage expenses during the first few years, but you need to either make sure you can afford the increased payments or be prepared to seek a long-term fixed rate mortgage when the rate changes.

If you only plan on living in your home for five years or less, a 5/1 ARM may be a smart move. This means five years of fixed payments, then a rate that adjusts based on a national or international one-year interest rate standard like the London Interbank Offered Rate (LIBOR) would keep your payments low and save you the need to refinance at a higher interest rate.

ARMs charge adjustable interest rates frequently based on six- or twelvemonth LIBOR rates plus a certain percentage, called the margin. Since 1987, six-month LIBOR has usually been between 3 and 7.5 percent, and twelve-month rates have ranged between 3.25 and 7.7 percent. It's best to take out an ARM when rates are historically average or high, as your loan payments will fall if the index interest rate falls. You can look up the current LIBOR and other index rates online.

In June of 2004, the 12-month LIBOR was 2.1 percent. Homeowners who opted for ARMs then have seen their LIBOR rates raised to 5.7 percent, which means they face monthly interest payments that are 50 percent or more above their original costs. These kinds of payment jumps can be financial suicide, so make sure you are able to afford the “lifetime cap” or highest interest rate allowed under your ARM.

If your income varies over time — you own your own business or are compensated on commission — an “option ARM” allows you just that, options. You may choose to pay only interest when you don't have the principal payment that month, to pay less than the full amount of interest if you're even more strapped for cash, or to pay full principal payments and interest when you do have the money. Option ARMs and “interest-only” mortgages (with no required principal payments for the first five or ten years) are useful if you have a variable income, but option ARMs can create negative amortization.

Given the volatility of mortgage rates and the leverage you gain by having preapproval, ask your lender if they are willing to guarantee “the best rate possible” when your deal closes. Otherwise, you could fall prey to rising or falling rates between the time when you seek preapproval and the time you close on a house.

What Can You Afford?

The FHA won't approve a loan whose total payments cost more than 29 percent of your gross or pretax income. If you have good credit, you may be able to raise the ration to 40 percent on a fixed mortgage, but if you have substantial debts, be careful not to overburden yourself with payments.

You may be offered mortgages with different interest rates based on the number of up-front fees, or “points,” you pay to the lender. Paying one point means that you pay the lender 1 percent of the total loan amount when the loan is made. The more points, the lower your interest rate. If you are certain that you will stay in the house for seven to 10 years, paying more in up-front points will probably be your best option.

The details will vary based on the rate break per point, which will vary by lender. For example, if you borrow $200,000 on a 30-year fixed mortgage and have the option to pay one extra point at the loan's closing in exchange for a 0.25 percent lower interest rate on your loan, you should pay the point if you believe you will stay in the house for more than seven years. Generally, if you plan to stay in your house for ten or more years, paying an extra point or two makes financial sense. You can find out how long you would have to stay in the house to benefit from paying extra points through an online calculator.

Once you acquire a mortgage, one of the smartest moves you can make is to pay 10 percent more than the minimum payment every month. For example, on a 30-year $200,000 fixed 7 percent mortgage, you could pay off your home in about 23 years and save $77,650 in interest.

It is important to understand the amortization schedule for your mortgage. For a 30-year fixed mortgage with a 7 percent interest rate, 81 percent of the first 12 years of mortgage payments go toward interest, enriching the mortgage lender. Over the next 12 years, 56 percent of your payments go to interest.

In the final six years of the mortgage, only 9 percent of your payments are for interest, while the remaining 91 percent is applied to paying down the balance of your mortgage. The same shift between interest and principal credit over time applies to most mortgages (not interest-only mortgages or option ARMs).