It is cliche but true that buying a house is the single most significant investment that most people will make in their lifetime. Tied into the American Dream of a good job and a loving family is the notion of home ownership . Many people are led astray by that dream into buying more house than they can afford. This may be due to the fact that they are in denial about their actual long term prospects or it could be because they simply don’t understand the nuances of mortgages.

A key thing to remember when figuring out how much mortgage is too much is the mortgage or interest rate. Mortgage Rates are determined by three factors. The first is the index being used by the lender in setting rates. This is usually tied to something like the Prime Rate or the Treasury Index. The second factor is the credit worthiness of the borrower. A stronger credit score and good debt ratios means a lower interest rate. The final consideration is the type of loan being secured. Fixed rate mortgages use the same interest rate for the life of the loan. Other mortgages, such as ARMs and hybrids, will are subject to changing rates.

The interest rate is so important because it directly impacts the monthly payment on a mortgage. Fixed rate mortgages will maintain the same base payment until the loan is paid off. Balloon mortgages will have one rate for the first part of the loan and then increase to a higher rate later on. Adjustable Rate Mortgages will be tied to the appropriate index and will change on a regular schedule that could be yearly, semi-annually, or even month to month.