Fixed-rate mortgages
A fixed-rate mortgage is so called because its interest rate doesn't change over the life of the loan, no matter what rates do on the open market. Many people feel more comfortable with a fixed rate, because they know their monthly mortgage payments will remain steady over the years, making at least one aspect of their monthly cash flow predictable. The downside is that you pay for that comfort: Lenders charge a higher rate of interest for fixed-rate loans. Why? Because they figure that if interest rates shoot up, they lose the opportunity to make more money on the funds they are lending you.

• On our blog, 'Listed': Homeownership hits decade low

The standard fixed loan lasts for 30 years, but if you can handle higher payments and want to build up your equity in your home faster, you can opt for a 15-year fixed. With a 15-year, you'll get a lower rate and pay much less interest over the life of the loan. The payments each month, however, will be quite a bit higher since they aren't being stretched over so long a period.

A fixed rate makes the most sense for those who plan to stay put in their new home for a long time. You pay a little more in interest, but it is stretched over a longer period so the monthly effect can be minimal. And if you're buying when rates are low, locking in a good deal is probably worth it.

• Facebook users: Become a fan of MSN Real Estate

Adjustable-rate mortgages
Adjustable-rate mortgages, known as ARMs, get their name because the rate you pay changes according to a set formula as interest rates fluctuate on the open market. As noted above, the upside is that lenders charge a lower rate for such loans because you are taking on some of the interest-rate risk. This makes your monthly payments lower — at least in the beginning. Such loans provide a way for many buyers to afford a larger loan amount for a given monthly payment. An adjustable works out wonderfully if rates drop — something you should never count on. But watch out if interest rates rise. In a year or two, your payments could far exceed what you would have paid for a 30-year fixed.

The trick with adjustables is to tailor the loan to your needs. Generally, the cheapest rate out there is on a one-year adjustable. With a one-year, your rate can change annually, making these loans particularly risky. Right now, one-year ARMs are disfavored by borrowers and lenders alike. While the interest rate on the one-year is still the lowest out there, there's no guarantee that this rate won't skyrocket next year, says Keith Gumbinger, a vice president at HSH Associates, a New Jersey-based mortgage information firm. Instead of choosing a one-year ARM, he suggests borrowers opt for a fixed-rate mortgage. This rate will never change. And, come next year, it's likely that the one-year ARM may have a higher rate than a fixed-rate that's locked in now. In addition, lenders have made the terms and conditions for a one-year ARM approval very strict. For example, a 5% down payment, which was sufficient about a year ago, is no longer enough. Now, in order to qualify for a one-year ARM, you'll need a down payment of at least 10%, Gumbinger says. "The hurdle is higher now for these mortgages than it is for a fixed-rate mortgage," he says.

There is a limit to how much an adjustable can adjust, however. Lenders limit the amount the rate can rise, often to no more than two points a year, with a lifetime cap of six points. Moreover, if you are willing to endure the hassle and expense of refinancing after a year, it's possible you'll come out ahead. See “Should you refinance?” for more.

A slightly more expensive option is what's known as a "delayed adjustable." When you see "3-1 adjustable" or "5-1 adjustable," it means that the loan stays fixed for three or five years and then resets annually. The longer the fixed period, the higher the rate. The idea is to match the loan to the amount of time you plan to stay in the house. For instance, if you expect to move after three years, a 3-1 is a great option. After five years, you might as well opt for a fixed rate. The price difference will be minimal.

Figuring out which kind of loan makes sense for you depends entirely on your circumstances and temperament. But several of the articles found here can help. “What kind of loan should I get?” walks you through some typical homebuying scenarios and suggests mortgage solutions. And you can use the worksheets found in “How much house can I afford?” and “Fixed or adjustable?” to help you decide what size loan you can handle and whether to take a chance on an adjustable.

4. "How does a bank decide if I get a loan or not?"
There are many factors that go into the bank's decision, from how long you've been at your job to how many credit cards you carry. The most important thing lenders look at, however, is your ability to meet your obligation to them, which is a function of your income and debt levels.

To gauge your ability to pay, lenders look at a pair of numbers called the "housing ratio" and the "total-obligation ratio."

They're not as daunting as they sound. The first is just the percentage of your gross monthly income that you'll need to spend on housing expenses after you buy the new home. It includes your mortgage payment, taxes, insurance and maintenance. Lenders will want to see a ratio of 36% or lower. The total-obligation ratio, meanwhile, is the portion of your income that goes to covering both your housing expenses and any other obligations, such as credit cards, car loans and child support. There, your lender will want to see a ratio of 42% or lower. Both of these ratios are often negotiable upward.

SmartMoney’s worksheet, “How much house can you afford?” will take you through the same process a lender uses to assess your application. It will tell you your ratios and give you an idea of what size house they will allow you to buy.