I was reminded recently that home ownership is one of the primary means of wealth accumulation in America today. In general, owning your own home is typically a pretty good investment, especially if you plan on staying in the house for more than a short period of time and if you plan to take good care of the home over the years.

That sounds pretty simple. But if you have never owned a home before, or if you come from a family that has no tradition of home ownership, the whole prospect of spending an extremely large sum of money on housing can be somewhat scary.

One of best ways to overcome fear is to have a clear understanding of the subject, so it might be helpful for me to review some of the questions I have been asked most often over the years.

If you have owned a home before, these answers might seem basic. But if you are new to the process, take time to understand each answer.

Q: How much home loan can I afford?

A: You may have heard that you can afford about two and a half times your annual gross income. Like most rules of thumb, that is a helpful shortcut, but it does not take into account a number of factors that lenders use to help determine your borrowing capacity.

The easiest way to get a good estimate of how much you can afford to borrow is to talk with a mortgage loan counselor. They will ask lots of questions about your personal finances, determine what your monthly income is and compare that with your monthly financial obligations. Then they can calculate the maximum amount you would qualify for under a fixed rate loan program.

In addition, they may suggest other types of loans that might allow you to borrow more dollars. At this stage, I recommend that you stick to a thirty year fixed rate, and that you ask the lender for a written "good faith estimate" of amount, rate and closing costs for the particular loan they recommend. This is called a loan "pre-qualification" and should cost you nothing.

Q: Exactly what is a mortgage?

A: It is a loan made for the purpose of buying real estate, and it not only requires that you qualify for the loan, but also that you post the real estate as collateral for the loan. Under this arrangement, if you fail to pay for the house, the lender can take the house away from you and sell it to pay off the loan.

Q: Why should I offer my house as collateral?

A: Because the lender will offer you a much better rate on your loan if he has the strong collateral of the house to fall back on. If you could qualify at all for a personal loan to buy a house, it would likely be short term and carry a high interest rate. In contrast, mortgage loans are among the most attractive loans available for any purpose, and typically have extremely low interest rates when compared to other forms of financing.

Q: How does a mortgage loan work?

A: The lender provides the bulk of the money you need to buy your home, then asks that you repay the money in equal monthly installments. Each installment consists of principal, which is used to repay the original loan, and interest, which is the rent you pay on the money you have used for the previous month.

While there are many types of home loans available, the most popular is a 30-year fixed rate loan. Under this program, the lender determines a standard monthly payment amount based on a loan amortization formula, then requires the borrower to make that fixed monthly payment every month.

If you make the minimum required payment every month, it will take exactly 30 years for the loan to be repaid in full. However, if you pay more than the minimum required with any monthly payment, the surplus is used to lower the loan balance, and that causes the loan to be repaid faster. That can save you money in interest charges.

Q: What happens to the loan when I sell my home?

A: In most cases, the lender will require that you pay off your remaining balance when you sell your home. That amount will be deducted from the selling price, and you will receive the difference at the settlement. Usually, an attorney will handle all the details of this transaction.

If you decide to buy a replacement home, you would typically apply for a new loan at that time.

Q: How can I determine what my monthly payment will be?

A: By using a loan amortization program, such as the one at my website. Visit www.money99.com and click on ADDITIONAL RESOURCES and FREE CALCULATORS. You will be asked to enter the number of payments, the interest rate, and the loan amount. Each of these has a direct impact on the size of your monthly payment.

Next week, we’ll look at ways to make your monthly payment more affordable.