Answer: There are basically five things to consider when determining the cost of your mortgage. These include:

Principal — The principal is the amount of the loan, calculated as the purchase price minus the down payment.

Interest Rate — The interest rate is basically the cost associated with borrowing money from the lender. Interest rates can fluctuate widely over time, so keep this in mind when timing your purchase. During times when interest rates are high, you may want to consider an adjustable rate, which is periodically increased or decreased over time to more closely match up with current rates and economic trends. A fixed rate is set, locking the interest rate for the remainder of the mortgage. Regardless of whether you select a fixed or adjustable interest rate, you should note that the interest amount will add significantly to the overall cost of your home – sometimes more than the price of the home itself!

Term — The term is the length of time until the loan is paid off. While a longer term means smaller payments, it usually means more interest as well, so the overall cost goes up the longer the term is. The following table shows the differences in monthly payment amounts and overall interest paid for different term lengths for a $350,000 loan with a fixed interest rate of 5.5 percent.
 

Points – Points are optional, but give you the ability to decrease the interest on your loan and make monthly payments smaller. Paid at closing time, each point equals one percent of the loan. They are considered a form of interest paid on the loan.

Fees – Paid to the lender at closing, fees cover the administrative cost of preparing a mortgage. They can vary based on what type of loan you need as well as where you live.

Lenders will consider a variety of factors when determining whether to approve you for a loan.

The first consideration is your ability to make payments. To establish your ability to afford the loan amount, the lender will look at your average housing expenses and weigh it against your net monthly income. Your housing expenses include the loan's monthly payment, as well as insurance costs, property taxes and any homeowner's association fees paid to the community.

Additional considerations include your total debt, meaning any credit card balances, child support, alimony payments, tuition, car loans or any other payments you are required to make in installments over the course of more than 10 years. To qualify for a loan, your monthly mortgage payment ideally should be less than 28 percent of your net monthly income. That said, lenders will sometimes make concessions for first time buyers, as they will typically have a smaller down payment amount available and therefore higher monthly payments to make against a loan.

The lender will also consider your credit history in order to determine whether you are a risk. The lender will review any mortgage payment history, rent payment history, credit card use and payment history on any installment debt you've accumulated. This concerns some people, as it's not uncommon to have made one or two late payments over one's lifetime, but keep in mind that the lender is really looking for patterns of late payments, especially those resulting in collections, repossessions, foreclosures or bankruptcies.

When you apply for a home loan, the home itself becomes collateral against your ability to make payments. Therefore, you will be expected to prove that the home is worth at least as much as the loan you are applying for. This will be substantiated by an inspection by a professional home inspector.

Lastly, the lender will likely evaluate your personal character. This is determined by the manner in which you conduct financial transactions. If it is apparent that you are a responsible borrower who is serious about paying off your debts on time, and if you appear to have integrity, you will likely be considered a good candidate for a loan.

Since a home loan is, in most cases, the biggest loan the average person applies for, lenders require substantial documentation.

You will be required to provide personal information, including the address and phone numbers of each applicant on the loan, any previous addresses for the past seven years, Social Security numbers for all applicants, the ages of applicants and their dependents, the name and address of any lenders or landlords for the previous two years and proof that payments were made. You will also need to detail your housing expenses, including rent, mortgages, taxes and insurance.

Each applicant will need to provide the name and address of all employers for the past two years. They must be able to show actual pay stubs for the past 30 days and W-2 forms for the past two years. If there are any gaps in employment over a two-year period, the applicant must supply a valid explanation for them. If an applicant is self-employed, they will need to show complete, signed Federal Income Tax returns for the past two years, as well as a year-to-date profit and loss statement and balance sheet for their company.

Any additional income, such as social security, pension, disability or VA benefits must be proven by either an awards letter, tax return or a copy of the most recent check. Any rental income can be proven by supplying a copy of the current lease.

Debt disclosure is required, including anything owed on credit cards, loans and current mortgages. The name and address of each creditor must be supplied, along with account numbers, monthly payments and outstanding balance for each. You must show proof of recent payment with a current statement. If you owe child support or alimony, you must provide documentation regarding the amount you are required to pay. If any past credit problems exist, you will be required to provide written explanation for them.

Required loan application documentation includes a complete, signed copy of the sales contract and a copy of your canceled earnest money check.

The application fee typically costs about $350 and the credit report fee is about $50.

Closing costs include any, and in some cases all, of the following: Down payment, lender's points, prepaid interest, loan origination fee, mortgage insurance, credit reports fee, appraisal and inspection fees, fees for surveys of the property, homeowner's insurance, attorney's fees, title search and insurance, prorated property taxes, recording fees, closing taxes, escrow account and insurance, as well as any other costs as specified in the purchase agreement.

Closing costs usually amount to about 1-2 percent of your total loan amount. You are typically required to pay these costs along with your down payment in the form of a cashier's check at closing. However, there are methods of reducing these costs – or even eliminating them altogether! One option is to have your mortgage amount increased to cover closing costs. In some cases, you can even negotiate with the seller to have them pay a portion of the costs prior to making a commitment to buy their home. You can also defer payment rather than paying some of these fees in large lump sums by opening an impound or escrow account. This allows you to divide your payments into installments billed monthly along with your loan principal and interest payment.

Though it does cost money to do so, refinancing can help decrease your monthly payments, cash in on your home equity, switch from an adjustable to a fixed rate, consolidate debt, or pay off your mortgage sooner.

The cost associated with refinancing usually takes about three years to pay off. Some lenders do offer no-cost refinancing, but keep in mind that this is typically in exchange for a higher interest rate. If you plan to stay in the house at least five more years and the new interest rate is at least 1.5 percentage points below your current interest rate, it's usually wise to refinance.