One of the first things to consider after deciding to purchase a house is what type of loan and terms are best suited for your situation. There are two main categories of mortgage loans, fixed and adjustable rate, and many variations within these two categories. Your choice will affect the total amount of a mortgage loan for which you will qualify and the amount of your monthly mortgage payment. Generally your monthly house payment, including property taxes and homeowner's insurance, should not exceed about 30% of your gross monthly income. There are three variables that affect your monthly payment amount: the interest rate, the term, and the loan amount.

The main appeal of a fixed rate mortgage is that you know exactly what your mortgage payment will be for the life of the loan. If interest rates rise, your mortgage payment will remain constant. If rates drop in the future, you always have the option of refinancing. Fixed rate mortgages are also an attractive choice for buyers who expect a steady (not climbing) source of income. The disadvantage is that fixed rate mortgage loans tend to have a higher interest rate than the prevailing rates for adjustable rate mortgage loans. This means that when your principal and interest payment (P & I) is calculated, it will be higher, and you may not be able to afford as much house.

The two most common fixed rate loans have terms of 15 or 30 years. There are also 20-year terms and, recently, 40-year terms have become available. Carefully evaluate the financial impact of the term you consider. For example, let's compare the difference in the monthly payment and the total interest paid on a $100,000 mortgage at 8% interest.

40 - year: As the illustration shows, while the 40-year loan provides a lower monthly payment, the higher amount of interest you will pay over the 40 years makes it a more expensive proposition for the moderate monthly savings over a 30-year mortgage payment. Don't forget that the longer the term, the longer you will have a mortgage payment, and the longer it will take to own your home.

30 - year: Thirty-year mortgages are the most traditional and are a popular choice for first time homebuyers who may need a stable monthly payment. The interest rate on a 30-year mortgage is typically a half percent higher than a 15-year mortgage, but you can shorten the term by simply making extra principal payments. This may be a good choice if you expect to stay in your home for a long time and want the flexibility that a lower mortgage payment provides. Because the payment is lower when spread out over a longer term, this option may also allow you to qualify for a higher loan amount.

15 - year: 15-year mortgage may be a good choice if you expect to stay in your home for a long time and have the cash flow to afford the higher monthly payment. The main benefit of this shorter term is that the amount of interest you pay over the life of a 15-year mortgage is almost half of what you pay on a 30-year mortgage, plus you'll own your home free and clear in half the time. To help you choose what type of mortgage is best for you, see the Federal Reserve Board publication Looking for the Best Mortgage. Use the CareOne Credit Calculators to help you compare 15-, 30-, and 40-year mortgages.

Everyone's situation is unique. You may want to go with a longer-term mortgage to take advantage of the tax deduction available on mortgage interest, and invest the monthly savings a 30-year mortgage payment affords. If you're closer to retirement age and more conservative with your investments, you may want to take advantage of the guaranteed savings the lower interest on a 15-year term offers. Be aware of your options, analyze your personal situation, and don't be afraid to ask your loan officer to explain your options. CareOne Credit can help you design a debt management solution.

Take control of your finances with our debt help tools. Use our calculators and budget planner to help you manage your money.

• When Should You Refinance? There are several reasons to refinance your mortgage for smart debt management. You can lower your monthly payment, take cash out of your equity to pay off debt, switch the terms of your loan or even change the type of loan.
  
  
• Preparing For Your Mortgage - From finding a lender to closing on the loan; buying a home can be a complicated process. Make it easier by understanding what happens along the way so you can make good choices in your mortgage selection process.
  
  
• A Home Inspection can Save You Thousands - A professional home inspection can uncover problems with the house unseen to the naked eye. You can then decide to void the contract to buy the house or negotiate repairs, rather than moving in only to find the problems later on which then eat your savings. Part of good debt management and financial planning is ensuring the product you are purchasing is not defective and negotiating better terms if it is. There are many reliable inspectors that can inspect the house from crack to corner and their detective work can mean the difference between buying a house or a dud.