What to look for when buying a house

Q: What should I look for when buying a house?

A: Make sure the house you plan on buying checks out, and ensure that your financial situation can support this important purchase.

Type of loans

You have a few options for the type of loan you want to use, which include fixed-rate, adjustable-rate and interest-only loans.

■ Fixed-rate home loan

The interest rate on this home loan stays the same over the life of the loan, with payments divided into equal amounts that you pay monthly. The longer the payoff term, the less you have to pay each month. Typically, you pay for the interest on the loan in the first few years, with more of your payment going toward the principal the longer you pay.

■ Adjustable-rate mortgage

The interest rate on an ARM changes from year to year. While most lenders charge a low introductory interest rate, you need to strongly consider how much your monthly payment could increase and your ability to pay if that occurs.

■ Interest-only home loan

Used primarily by more affluent homebuyers, this loan requires you to pay only interest for a set period. After that, your payments reset and you begin paying both interest and principal. Usually, the amount you pay goes up when this reset occurs, even when the interest rate stays the same.

Credit score

This score helps creditors determine your creditworthiness. If you have a credit score below 620, expect to be offered a higher interest rate on your loan.

If your credit score drops too low, you might not qualify for a home loan at all. A good credit score for buying a house is above 650. Consider improving your credit score before trying to buy a house.

House price

Remember to consider your needs. Do you have a new addition to the family and need the room? Have your kids moved out and you want a smaller home?

Take a look at the price range of the houses available in the area where you want to buy.

Compare the prices to your budget to determine what home you can afford.

Down payment

A large down payment represents one way to reduce the monthly cost of your mortgage. A down payment of 20 percent gives you access to better interest rates. Besides lowering the amount you owe initially, a down payment also can get you a lower interest rate.