Loan-to-value ratio. To determine the loan amount, lenders use the loan-to-value ratio (LTV), which is a percentage of the appraisal value of your home. The usual limit is 80 percent — or $100,000 for a $125,000 home (.805125,000). Lenders subtract the mortgage balance from that amount to arrive at the maximum you can borrow. Assuming your balance is $60,000, the largest loan that you can obtain is $40,000 ($100,000-$60,000=$40,000). If you have a good credit rating, a lender might base your loan on more than 80 percent of the LTV; if you don't, you might get only 65 to 70 percent. While many lenders go to 100 percent of the LTV, interest rates and fees soar at these higher ratios.

Your income. If you also have high expenses, a high income level might not mean a larger loan. Lenders follow two rules to minimize their risk:

•Your house payment and other debt should be below 36 percent of your gross monthly income.

• Your house payment alone (including principal, interest, taxes, and insurance) should be no more than 28 percent of your gross monthly income. The maximum debt-to-income ratio rises to 42 percent on second mortgages. Some lenders go even higher, though fees and rates get expensive — as will your monthly payment. However, a debt-to-income ratio of 38 percent probably is the highest you should consider carrying.

The LTV determines how much you can borrow, and your debt-to-income ratio establishes the monthly payment for which you qualify. Within these two limits, the biggest trade-offs are interest rates, loan term, and points.

Interest rates. The less interest you pay, the more loan you can afford. An adjustable-rate mortgage (ARM) is one way to lower that rate, at least temporarily. Because lenders aren't locked into a fixed rate for 30 years, ARMs start off with much lower rates. But the rates can change every 6, 12, or 24 months thereafter. Most have yearly caps on increases and a ceiling on how high the rate climbs. But if rates climb quickly, so will your payments.

Loan term. The longer the loan, the lower the monthly payment. But total interest is much higher. That's why you'll pay far less for a 15-year loan than for a 30-year loan — if you can afford the higher monthly payments.

Points. Each point is an up-front cost equal to 1 percent of the loan. Points are interest paid in advance, and they can lower monthly payments. But if your credit is less than perfect, you'll probably have to pay points simply to get the loan.
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