When shopping for a house, it's crucial to understand your financing options early on -- both in terms of types of loans and mortgage lenders -- so that you can find the most cost-effective mortgage.

What are the best sources of home loans or mortgages?

Many entities, including banks, credit unions, savings and loans, insurance companies and mortgage bankers make home loans. Lenders and terms change frequently as new companies appear, old ones merge and market conditions fluctuate. To get the best deal, compare loans and fees with at least a half a dozen lenders. Because many types of home loans are standardized to comply with rules established by the Federal National Mortgage Association (Fannie Mae) and other quasi-governmental corporations that purchase loans from lenders, comparison shopping is not difficult. Be sure to ask for the same size, type, and length of mortgage -- such as a 30-year fixed term mortgage for $300,000 -- so you're comparing apples to apples.

Fortunately, mortgage rates and fees are usually published in the real estate sections of metropolitan newspapers, and are increasingly available on online mortgage websites. You can also work with a loan broker, someone who specializes in matching house buyers and appropriate mortgage lenders, normally collecting their fee from the lender.

Be sure to check out government-subsidized mortgages, which have no down payment and low down payment plans. Also, ask banks and other private lenders about any "first-time buyer" programs that offer low down payment plans and flexible qualifying guidelines to low- and moderate-income buyers with good credit.

Finally, don't forget private sources of mortgage money -- parents, other relatives, friends or even the seller of the house you want to buy. Borrowing money privately is usually the most cost-efficient mortgage of all.

What are options for buyers who can't afford a 20% down payment?

Assuming you can afford (and qualify for) high monthly mortgage payments and have an excellent credit history, you should be able to find a low (10-15%) down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment.

What is private mortgage insurance?

Another source of down payment money is a loan against your 401(k) plan. Ask your employer or plan administrator if your plan allows for loans. If it does, the maximum loan amount under the law is the one-half of your interest in the plan or $50,000, whichever is less. Other conditions, including the maximum term, the minimum loan amount, the interest rate and applicable loan fees, are set by your employer. Any loan must be repaid in a "reasonable amount of time," although the Tax Code doesn't define reasonable. Be sure to find out what happens if you leave your job before fully repaying a loan from your 401(k) plan. If a loan becomes due immediately upon your departure, income tax penalties may apply to the outstanding balance.

Can I tap into my IRA or 401(k) plan for down payment money?

Under the 1997 Taxpayer Relief Act, first-time homebuyers can withdraw up to $10,000 penalty free from an individual retirement account (IRA) for a down payment to purchase a principal residence. This $10,000 is a lifetime limit. The law defines a first-time homeowner as someone who hasn't owned a house for the past two years. If a couple is buying a home, both must be first-time homeowners. Ask your tax accountant for more information, or check IRS rules at http://www.irs.gov.

Another source of down payment money is a loan against your 401(k) plan. Ask your employer or plan administrator if your plan allows for loans. If it does, the maximum loan amount under the law is the one-half of your interest in the plan or $50,000, whichever is less. Other conditions, including the maximum term, the minimum loan amount, the interest rate and applicable loan fees, are set by your employer. Any loan must be repaid in a "reasonable amount of time," although the Tax Code doesn't define reasonable. Be sure to find out what happens if you leave your job before fully repaying a loan from your 401(k) plan. If a loan becomes due immediately upon your departure, income tax penalties may apply to the outstanding balance.

What kinds of government loans are available to homebuyers?

Several federal, state and local government financing programs are available to homebuyers. The two main federal programs are:

VA Loans. U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with an other than dishonorable discharge who meet specific eligibility rules, most of which relate to length of service. The VA doesn't make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan or other private lender. If you default, the VA pays the lender the amount guaranteed. This guarantee makes it easier for veterans to get favorable loan terms with a low down payment. For more information, check the VA's Website at http://www.va.gov or contact a regional VA office for advice.

FHA Loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), insures loans made to all U.S. citizens and permanent residents who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that it requires a low down payment, usually about 2% to 5%. For more information, on FHA loan programs, contact a regional office of HUD or check the FHA website at http://www.hud.gov/mortprog.html.

For information on other government loans, contact your state and local housing offices. They often have programs available for first-time homebuyers who are purchasing modestly-priced properties. To find your state housing office, check U.S. State Resources on Findlaw ( http://www.findlaw.com/state_gov/index.html). Start by looking at your state's home page. You'll probably find the listing for your state's housing office.

What's the difference between a fixed and adjustable rate mortgage?

With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15, 20 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end.

With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate lower than for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years.

Which is better -- a fixed or adjustable rate mortgage?

It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:

• the interest rates and mortgage options available when you're buying a house
• your view of the future (generally, high inflation will mean ARM rates will go up and lower inflation that they will fall), and
• how willing you are to take a risk.

When mortgage rates are low, a fixed rate mortgage is the best bet for most buyers. Over the next five, ten or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARM's teaser rate will adjust up soon and you won't gain much. In the long run, ARMs are likely to go up, meaning most buyers will be best off to lock in a favorable fixed rate now and not take the risk of much higher rates later.

Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. If you take out a loan now, and several years from now interest rates have dropped, refinancing will probably be an option.

How do I find the least costly mortgage?

You can save real money if you carefully shop for a mortgage. Everything else being equal, even a one-quarter percentage point difference in interest rates can mean savings of thousands of dollars over the life of a mortgage.

In addition to comparing interest rates, there are a variety of fees -- and fee amounts -- associated with getting a mortgage, including loan application fees, credit check fees, private mortgage insurance (if you're making a low down payment) and points. Since points comprise the largest part of lender fees, it's important to understand how they work: One point is 1% of the loan principal. Thus, your fee for borrowing $250,000 at two points is $5,000. There is normally a direct relationship between the number of points lenders charge and the interest rates they quote for the same type of mortgage, such as a fixed rate. The more points you pay, the lower your rate of interest, and vice versa.

Before comparing points to interest, factor in how long you plan to own your house. The longer you live in your house (or pay on the mortgage), the better off you'll be paying more points up front in return for a lower interest rate. On the other hand, if you think you'll sell or refinance your house within two or three years, we strongly recommend that you obtain a loan with as few points as possible.

A good loan officer or loan broker can walk you through all options and trade-offs such as higher fees or points for a lower interest rate. Or you can check Online Mortgage and Financial Calculators, such as http://www.homepath.com to quickly compare various combinations of interest rates and points. This website, operated by Fannie Mae, includes a wide range of consumer information on mortgages and is especially useful to new homebuyers.

Many online services provide mortgage rate information. Rather than collecting rate information in person or on the phone, you can simply turn on your computer and surf the Web. While online mortgage sites are still fairly new, and don't provide information on all the loans available, they offer a great way to get a good sense of market rates, points and terms and useful advice on choosing a mortgage. And even if you are considering a loan you found via more traditional approaches, you can check the Internet to see if you have been offered the best terms.