Last week we looked at ways to make monthly payments more affordable. We examined loan term, interest rate and loan amount as the key factors influencing a monthly payment.

Other factors also come into play. Although they may seem obvious to an experienced homeowner, they are well worth covering for those just starting the journey to ownership.

Risk of 'interest only' loans

As you begin talking to a lender, you will hear about a wide variety of loans. One of the most popular is the "interest only" adjustable rate loan, which features low monthly payments of interest only. It also has a very low "starter" interest rate.

The rate may change frequently, and the starter may be as low as 3 percent. The interest rate is based on an index set half a world away. It's called the LIBOR, which is short for London Inter-Bank Offered Rate. It is the rate of interest that banks in London charge one another for overnight deposits of dollars.

Because the business climate in Europe has been depressed for several years, relatively few businesses have been borrowing to expand, so funds to lend are plentiful. That's why rates have been and continue to be low. When the economy of Europe takes off, demand for these funds is likely to rise.

This type of loan is popular for two reasons: It has a low initial starting rate and has no principal repayment. That's why I cannot recommend these loans.

First, the interest rate is bound to rise, and many of these loans have no caps built in to limit the amount of payment increase. If you are already on a tight budget, a big increase in your monthly payment could spell disaster.

Second, by eliminating principal repayment from your monthly obligation, you are counting solely on appreciation to build your net worth in real estate. But it may not be enough.

When you want to sell, you'd be owing the same amount you did on the day you purchased -- and you may not have enough equity to pay a real estate commission or cover the other expenses of a sale.

The principal portion of a traditional loan is very small in the early years, but it still grows, and the payment differential is almost nothing.

Call me old-fashioned, but I am more comfortable with a 30-year fixed rate, especially in the face of an improving worldwide economy and a reasonable expectation of rising interest rates.

Know your credit history

Another factor in monthly rates is the degree of risk the lender associates with your application. In other words, how likely is it that you will repay on time?

This factor is measured in terms of your credit score, a three-digit number somewhere between 300 and 900. A score of 750 or higher is considered excellent. A score below 620 will cause your interest rates to be higher. The scores are calculated by Fair, Isaac & Co. and are based on information in your credit report.

How can you boost your credit score? Do these three things:

• First, correct any errors in your credit history. Copies of it are free from each of the major credit reporting agencies, which will work with you to correct errors.

• Second, you can contact merchants reporting negative information about you and request that they modify their records based on your circumstances.

For example, if you were late on a car payment because you were called to active duty in the military, a lender might modify the records. Likewise, a major medical challenge might be taken into consideration by a creditor, especially if you could prove hardship. Creditors have wide latitude in reporting negative information.

• Fair, Isaac & Co. says the most important thing you can do to improve your credit score is to use credit wisely and not become overextended. In other words, you should pay your bills on time each month.

For more information on credit scoring, visit my Web site at www.money99.com and download the free "Credit Scoring Booklet" by Fair, Isaac & Co. It is a great introduction to credit reporting and lending.

By choosing the best home mortgage loan for you and keeping your credit score as high as possible, you are likely to get a good deal.

John Adams is a broker and investor.