How does a mortgage differ from other types of loans?

A mortgage is a secured loan. When you get the loan, you pledge a property
(the house you're buying) to the lender to back up your promise to repay the debt.
On the other hand, personal loans are generally backed up only by the borrower's
signature and past credit history, and carry a higher interest rate. Since real estate
tends to hold its value better than other forms of property (such as a car or a boat),
a home is a valuable security for a lender. That's why the lender is willing to lend
you a large amount of money at a relatively low interest rate.

Should I get the largest loan I can?

Yes, you should. The standard mortgage covers 80% of the cost of the home.
However, you can get a mortgage for as much as 97.5% of cost. You may want a
larger loan because you may not have enough cash. But even if you do have the
cash, you don't want to tie it up in your house, since you won't be able to get it out
if you need the money in a hurry. Also, if you're buying a home as an investment, a larger loan gives you more leverage. Your profits from appreciation will be a higher
percentage of your equity. On the other hand, a larger loan will require higher
monthly payments, and if your income declines, you may have difficulty meeting the payments.

Does a mortgage affect my income tax?

All interest paid on a mortgage loan (used to purchase a home) is an itemized
deduction for federal income taxes up to a limit of $1 million in loan principal.
For a second mortgage, or a refinanced first mortgage, interest is deductible up to a
limit of $100,000 over the amount of the loan used to purchase the home. These
deductions apply to both first and second homes, and the property value must
exceed the debts.

What's the difference between a first and a second mortgage?

A first mortgage gives the lender first claim to the home in the case of default on the
loan. After the loan is foreclosed and the home is sold to satisfy the debt of the first
mortgage, any sales proceeds left can be claimed by the holder of the second
mortgage. Because of this priority, a first mortgage is less risky for the lender than a
second mortgage. Consequently, interest rates and terms on first mortgage loans are
more favorable to the borrower. In most cases, second mortgage loans are used to
take equity out of the home when it is desirable to preserve the existing first mortgage
loan.

What is mortgage insurance?

Mortgage lenders consider a loan for 80% of the value of the home the maximum
amount of risk exposure they may undertake. They will, however, make loans for
higher amounts if the loan is insured against borrower default. The Federal Housing
Administration (FHA) offers mortgage insurance on loans below a specified dollar
amount. Larger loans may be insured by private companies specializing in this service.
Also, the Veterans Administration (VA) guarantees loans for eligible military veterans.
The guarantee is not the same as insurance, but it has the effect of allowing the
borrower to get a loan with a very small down payment.