"Points, also known as loan origination or loan discount fees, are paid up front when you purchase a home. Paying points reduces the interest rate on your loan. Each point is equivalent to one percent of the loan amount and each point paid usually reduces your interest rate by 1/8, or .125 of a percentage point. For example, if you pay two points at closing on a $100,000 loan ($2,000) at 7.5 percent, you could lower your interest rate from 7.5 percent to 7.25 percent. Points are tax deductible in the year you pay them."

“How large of a monthly mortgage payment can you afford? The guideline is that your household should spend a maximum of 28 percent of its gross monthly income (income before taxes) on monthly housing expenses. Your monthly income includes salary, bonus, dividends, and interest. Monthly housing expenses include mortgage principal and interest, real estate taxes, and homeowners insurance.

"A second guideline is that your monthly housing expenses plus other long-term debts (including educational loans, car loans, alimony and child support, and other loans) should not exceed 36 percent of your gross monthly income. These factors are flexible, so if you are currently paying more than 28 percent of your gross salary for rent, you may be able to qualify for a loan that would require you to pay more than 28 percent in monthly mortgage expenses.

"Some lenders offer special loan programs for lower and moderate-income buyers. In this program, you can qualify with monthly housing expenses of up to 33 percent and total debt of up to 38 percent."

"The first question to ponder is how much you can afford to put down on the purchase of your home. The size of your down payment will have an inverse relationship to the amount of your loan---the larger the down payment, the smaller the loan (and the smaller your monthly payments will be). The minimum down payment you'll need to come up with is 5 percent of the purchase price of the home.

"Additionally, if you put down less than 20 percent, you are required to buy private mortgage insurance (PMI). This insurance protects your mortgage company lender in case you fail to make payments. The cost of PMI will be added to your monthly mortgage payments and to closing costs. Once you have paid down the loan to have 20 percent equity in your home, you can cancel the insurance policy. You won't need PMI if you can get a FHA loan or a VA loan.

"When mulling over how much you'll put down, remember to earmark funds for an emergency cash reserve and for upcoming expenses (for example, college education, moving expenses, and home-decorating costs). You'll also need cash for closing costs, including transfer and recording taxes, attorney fees, title insurance, and document preparation fees.

"You can ballpark closing costs by calling a real estate agent and asking what typical closing costs are for your area. The average closing costs run 3 percent to 6 percent of your mortgage loan amount."