The price of home that you can afford to purchase rests on two things: the amount of money that you can invest in the down payment, and how much you can afford for the monthly housing payment.

There are numerous applications on the internet designed to calculate home affordability. In addition, almost every home search website has an estimated monthly payment figure which is deceptively low.

If you're purchasing in Baltimore, speak with a lender about getting pre-approved or pre-qualified. This is the surest, least stressful way to assess your affordability range and ability to purchase.

Keep in mind, whether you have been pre-qualified or pre- approved, this amount does not bear any relationship to the home affordability. You, not the lender, determine affordability. Simply because a lender qualified you for a certain amount, this does not mean that you are comfortable spending this amount each month. It is up to you to determine whether the lender figures are appropriate for your personal budget.

Fixed-Rate Mortgages
Fixed-rate mortgages give you the security of knowing your monthly principal and interest payment will not change over the life of the loan. This type of conventional mortgage also protects you from rising interest rates. No matter how high market interest rates go, your mortgage rate remains the same.

Fixed-rate mortgages are best for people who:

• Prefer regular payments with no surprises
• Are on limited or fixed incomes
• Plan to stay in their homes a long time
• Are buying a home at a time when interest rates are comparatively low

Adjustable Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that is fixed for the first one to 10 years and then adjusts periodically based on financial market conditions. During the initial fixed period, an ARM has a lower interest rate than a comparable fixed-rate mortgage, so you'll save on your monthly payments during the early years of your loan term. Because this type of conventional mortgage offers lower upfront monthly payments, it can help you:

• Buy a more expensive home. Because your maximum loan amount is based on the initial monthly payments, you may be able to borrow more.
• Manage your cash flow in a high-rate environment. If you are buying a home at a time when interest rates are comparatively high, an ARM can help you avoid making high monthly payments right away.
• Plan for future income growth. An ARM can help you keep your payments low while your income increases during the loan's fixed period.
• Potentially improve your credit standing. The lower initial rate can make your payments easier to manage, helping you improve your credit and expand your financing opportunities if you make timely payments on your mortgage loan and other credit obligations.
• Save money if you expect to move or refinance. If you plan to move or refinance before the end of the loan's initial fixed period, you can take advantage of an ARM's lower payments without worrying about future rate increases.

After the initial fixed-rate period, the remainder of the loan term is divided into adjustment periods of one year or six months, depending on the ARM product you choose. At the end of each adjustment period, the interest rate may change based on prevailing market conditions.

If you are new to the home purchase process or have not purchased a home in Baltimore during the last several years, you will find that there are numerous mortgage options out there for buyers.

Below you will find general information on some of the key loan options available to most buyers. For additional information on each of these loan sources, click on to corresponding links for each loan program.

FHA Loan
With an FHA loan, the Federal Housing Authority insures federally qualified lenders against any default payments by the borrower. While the down payment can be as low as 3.5% of the purchase price, the FHA charges the borrower an up-front mortgage insurance premium (MIP) fee. Prepaid interest, called points, may also be charged by the lender.

VA Loan
If you or your spouse is a qualified veteran, you can apply for a VA loan guaranteed by the Department of Veteran Affairs. Under this program, eligible veterans can receive a mortgage loan up to $417,000 with no down payment. Higher loan balances may require a down payment.

Conventional Mortgage
A conventional mortgage is a loan to purchase property made between a lending institution and a borrower without a third-party participant, such as the FHA or VA. Most types of conventional loans are paid off over 15, 25, or 30 years.

When the down payment is less than 20%, it is often necessary for the loan to have private mortgage insurance (PMI) to protect the lender. Private mortgage insurance (PMI) is insurance written by a private company that protects the lender from losses in the event the borrower defaults on the mortgage. Borrowers are required to pay the premium for private mortgage insurance. Private mortgage insurance limits a lender's exposure to financial loss resulting from loan default.

Five years ago buying a home with no money down was the norm for many Baltimore first-time buyers. With the recent troubles experienced by the mortgage industry, the need for a down payment is on the rise. In this section, the top alternatives down for you into options which many Baltimore first-time buyers select:

Employer Assistance Plans: Even though home buyer programs take money away for the company, many employers understand that it is a good investment. Homebuyer assistance is an excellent way to attract top notch employees and retain existing ones. Hereis a list of Baltimore's most popular Employer Assistance Programs.

Gift Funds: If friends or family members are willing, you are eligible to receive gifts toward the purchase of you home. The typical gifts funds amount is between 1% and 7% of a home's purchase price. Remember, if you plan to use gifts funds, your lender will require documentation to support the source of the funds.

Incentive Programs: Whether moving to Baltimore City or the County, there are a variety of programs offered by non-profit organizations providing grants and gift funds to new home buyers. Often, the funds are available in exchange for attendance at a couple of 2-3 hour home buyer seminars. Here isa list of Baltimore's most popular Homebuyer Incentive Programs.

IRAs, Thrift Savings Plans, 401(k)s & Keogh Accounts: Many first-time buyers explore the possibility of withdrawing or borrowing against what you have in your employer's profit sharing or savings plan account. Funds will need to be paid pack over time to avoid penalties, but this is one of the most popular sources of home purchase funds.

Sale of Personal Property: Less popular, but equally as effective, than some of the other down payment alternatives. Some buyers opt to sell cars or other personal property to raise the money necessary for a down payment.

Saving & Checking Accounts: This is the most popular source of down payment and closing funds for most buyers. Funds are held in the account until needed, then used to pay for down payment and other home purchase costs.

Stocks, Bonds, & Mutual Funds: Second to savings and checking account funds, stocks, bonds, and mutual funds are the second most popular source of down payment funds. Prior to withdrawing funds from these accounts, Buyers should make sure they understand the institution's policies on potential penalties and repayments.

Tax Refunds: Tax time is one of the busiest seasons for homebuyers. Each year, millions of buyers file their taxes early for the express purpose of using the monies received to purchase a home.

Finally, a word of caution, don't plan to spend your last penny to buy your home. Of course, the larger the down payment, the less money you need to borrow, however, you will still need money for closing costs, moving, setting up your new home, other miscellaneous expenses, and possible emergencies. Be sure to keep this in mind as you move forward with your purchase decisions.