Home buyers act now - interest rates on the rise.

Thinking of buying a home? Now may be the time to act, since short-term interest rates are rising. The good news is that despite rising mortgage rates, home affordability for the typical American family is at its second-highest level in 20 years, according to the National Association of Realtors.

You should be aware, however, that buying in a rising interest rate market requires a different strategy from buying when rates are stable or declining. You should check into all program and product options before beginning the home buying process, to be sure that you chose the most appropriate home financing situation for your individual needs.

In addition, choosing a lender is just as important as selecting the house you'll live in. It's important to work with a reputable, longstanding lender that offers a variety of loan programs and has the ability to honor its interest rate commitments. A lender that is efficient and service-oriented is less likely to renege on a rate commitment.

Following are some suggestions for getting the most value out of today's interest rate market:

Lock in a rate on a fixed or adjustable rate loan rather than floating the interest rate until you close. If you're concerned that rates will rise, locking in the current rate may protect you from a higher rate. Generally, lenders will allow you to lock in a rate for a specific period (typically 30 to 60 days), with no charge. As long as your loan is processed during that time period, you will receive your locked-in rate, which can save you thousands of dollars over the life of the loan -- if rates have risen during the processing period.

For example, in early March, consumers might have been able to lock in a 30-year conforming, fixed-rate loan for approximately 7 1/2% at 2 1/4 points. If they had waited to lock in a rate when such a loan would close in mid-April, the price would have increased to 8 1/8% at 2 1/4 points. On a $125,000 loan, the lower rate would save approximately $54 on the monthly mortgage; over the life of the loan, the savings would be $23,373.

To qualify for a higher loan amount, you might consider an adjustable rate mortgage (ARM). These loans feature a significantly lower initial interest rate than fixed-rate loans. That makes qualifying easier and can add up to substantial savings during the early years of the loan. Rates are adjusted based on an independent, published financial index, and annual and lifetime caps protect borrowers against rapid interest rate increases by limiting how much the payment and interest rate can rise.

If interest rates fall, the monthly payment is also likely to decrease. Some ARM products are convertible to a fixed-rate loan and are assumable by the new buyer, which can assist you when selling your home. ARMs are particularly well-suited to first-time buyers with limited cash or income, those who anticipate income growth and families who plan to move within a few years.

Home loan products vary in terms, interest rates and principal-and-interest payment schedules. Only you can determine which loan is most acceptable by evaluating your financial situation. Following are a few scenarios and some suggested loan products:

Borrowers on a fixed income -- The fixed-rate loan is especially popular during a rising interest rate environment, since it allows you to lock into a low rate, and fixes principal and interest payments that won't change over the life of the loan. The stability and predictability of the loan may attract you if you have a fixed income (a retiree, for example), or plan to stay in your home for a long period of time. Commonly available in 15-, 20-, 25- and 30-year products, this loan is paid in full at the term's end.

Buyers who plan on moving within a short time frame -- You may prefer either the ARM (described above) or Balloon loan if you plan on staying in your home for a short period of time. Commonly offered in 5-, 7- or 10-year terms, the balloon loan features monthly payments based on a 30-year fixed-rate product. Since balloons usually are available at a lesser rate and/or points than a fixed-rate loan, the balloon offers the advantages of the fixed-rate product but at a lower price. Unlike the fixed-rate loan, the entire balance is due at the end of the balloon period.

Veterans -- If you are an eligible veteran, you can take advantage of the Veteran's Administration (VA) loan, which requires no down payment in most cases. With the current low rates, refinancing now may be particularly attractive to the more than 2.1 million veterans who have VA-guaranteed loans at interest rates ranging from 8.5% to 17.5%.

The only limitation on this product is a maximum loan amount established by the VA; however, this is usually higher than the Federal Housing Administration's loan limits. Laws passed last year now guarantee VA loans at an interest rate negotiated and agreed upon by the veteran and the lender. Previously, VA interest rates were at a regulated, maximum rate with no negotiation.

Consumers challenged by the down payment hurdle -- You may consider applying for the Federal Housing Administration (FHA) product, which offers low down payment loans that require less up-front cash and can help low- and moderate-income and first-time borrowers own a home of their own. Maximum loan amounts are set by the FHA and differ for each area. Both up-front and monthly mortgage insurance premiums are required on FHA loans.

The U.S. Department of Housing and Urban Development (HUD) reduced the up-front insurance premium to 2.25% of the loan amount, down from 3%. This reduction, effective April 17, can potentially save home buyers approximately $1,140 on a loan of $151,725, which is the maximum mortgage amount (in designated high-cost areas) that FHA will insure on single-family home loans. An estimated 270,000 additional households may qualify for FHA loans under the new reduction.

The FHA has recently introduced the FHA Energy Efficient Mortgage Pilot Program (EEM) to encourage environmental responsibility while reducing a borrower's out-of-pocket mortgage expenses. Available for purchases or refinances on existing properties in FHA-designated areas of Alaska, Arkansas, California, Vermont and Virginia only, this program allows a borrower to finance 100% of the cost of eligible energy-efficient improvements into the mortgage loan.

Energy-efficient home improvements costing $4,000 or 5% (up to $8,000) of the property's value -- whichever is greater -- can be financed into the mortgage loan. The designated maximum loan amount may be exceeded on an EEM loan by the added cost of energy-efficient improvements. FHA allows a lender to consider the monthly utility savings realized by the borrower when calculating housing and debt ratios.

Greg Lumsden is executive vice president of the Retail division for Countrywide Funding Corporation, the nation's largest mortgage lender and servicer. Founded in 1969, the company has more than 275 retail offices across the nation.