Owning a home is typically a good investment. But if you have never owned a home, the prospect of spending a large sum on housing can be scary.

One of best ways to fight that fear is to understand the process. So let's review some common questions:

Q: How much loan can I afford?

A: You may have heard that you can afford about 2 1/2 times your annual gross income. Like most rules of thumb, this can give you a general idea, but it does not take into account some factors that lenders use to help determine your borrowing capacity.

The easiest way to get a good estimate of how much you can afford is to talk with a mortgage loan counselor. You'll be asked lots of questions about your personal finances and monthly income as well as your monthly financial obligations. That will set the stage for calculating the maximum amount you could get for a fixed rate loan.

You also might get hints on other loans that might allow you to borrow more. I suggest you stick to a 30-year fixed rate and ask the lender for a written good-faith estimate of the amount, rate and closing costs. This prequalification should cost you nothing.

Q: Exactly what is a mortgage?

A: It is a loan made for the purpose of buying real estate. It requires not only 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 with 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 based on a loan amortization formula, then requires the borrower to make that fixed monthly payment every month.

If you make the minimum payment required 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.

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 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 Web site. 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.

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

John Adams is a broker and investor. His Web site is www.money99.com.