So you're ready to buy a home. Let's focus on first things first:
Be sure that you have a good overview of your financial health -- and don't think of your mortgage separately.
"It should be a part of a larger financial plan," said Doug Duncan, chief economist at the Mortgage Bankers Association. "You should have a household balance sheet and income statement of what things you own, their value, and what things you owe."
Then pull your credit report and "understand what you look like in terms of your past performance in managing credit," he said, because a lender will be looking at the same thing.
"Have an idea of how much you make and where it all goes," Duncan said. "When you know how much you can afford, you can decide how to finance it."
Only then will it be time to mortgage-shop.
Although it's foremost in most consumers' minds, don't obsess on the lower monthly mortgage payments that many creative mortgage products offer.
"If your objective is to live in the home and retire and pay this home off, you can't be lured by the lower monthly payment because the lower your monthly payment, the less you will be reducing the principal on the loan," says Anthony Hsieh, president of LendingTree Loans.
The hottest home-loan product at the moment is an interest-only mortgage, which allows you to get a bigger loan and more house.
Most interest-only payment plans are offered on adjustable-rate mortgages, but they can also be found on fixed-rate loans.
"The name is misleading," says Keith Gumbinger, a vice president and analyst at HSH Associates, a mortgage-information publisher. "There is no such thing as an interest-only mortgage because eventually you'll have to pay the loan principal as well."
The standard payment on a 6 percent, 30-year $100,000 loan is about $600, he says. Of that, $500 is interest. So if you opt for an "interest-only" loan, he said, you're reducing your payment by only $100 a month -- and you're not building equity.
"The only appreciation you could hope for is in real estate prices," says Paul Havemann, also an HSH vice president.
And we know that doesn't always happen, although it's occurred lately, driven by low interest rates.
"Everybody is betting on the future -- that we're going to have these big price appreciations in housing, that we're all going to get big raises," says Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co. "What if you don't get promoted? What if you don't get a raise? What if your house doesn't appreciate?"
He and other mortgage experts say interest-only mortgages are best suited for home buyers who plan to move before the principal comes due, for those who expect their incomes to rise strongly over time, and for those who get the bulk of their income in bonuses.
Like interest-only mortgages, option adjustable-rate mortgages are enjoying a surge in popularity. But these, too, require caution, the experts say.
This kind of mortgage gives borrowers the option to pay less than the interest charged on their loans by deferring part of that payment and adding it to the original loan balance.
The lure is a lower payment. On the other hand, if you choose that option, you will end up owing more than your original balance.
"Why would you take a loan product that goes backwards?" Jarrell said. "That's just insane."
There are also mortgage products that allow you to put nothing down, which also slow your ability to accumulate equity.
In Mark and Jessica Callahan's case, it was the right type of mortgage. The couple, both 25, are negotiating to buy their first home. Their loan is a 30-year fixed-rate mortgage with an 80 percent first lien and a 20 percent second lien.
"We don't have a lot of savings that a lot of people do," says Callahan, an investment-portfolio specialist, who has a master's degree in real estate finance. "I got a second lien because I didn't want to pay PMI (private mortgage insurance)."
Lenders have traditionally required buyers who borrow more than 80 percent of the home's price to pay mortgage insurance to protect against default.
"I got this even with a higher interest rate just to deduct the interest," Callahan said.
In the Callahans' case, putting zero down works for them, said Jarrell, their lender.
"He's a young, upwardly mobile professional with an MBA, who will be making more money and has the financial discipline to save money and to pay off his bills," Jarrell says.
Callahan advises consumers to not be enticed by lenders who tell them they can qualify for a high mortgage amount.
"You've got to be very logical in your decision," he said. "That's the maximum loan you can shoulder, but that doesn't mean you should go for it."