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  Dear
Dr. Don,
Help! My boyfriend and I are trying to buy a
townhouse. We don't have any money to put down and only have a little
bit saved to cover closing costs. I have been offered several quotes
with low rates, but they are getting very confusing and I am worried
about getting suckered into a scam.
The
home we want costs $115,000, and we've been offered a 5/1 ARM at
4.625 percent ($473.01), plus a HELOC at 6.5 percent ($125). The
thing is, this cannot change, meaning this is all we can afford
monthly, and even this is a stretch. What are the risks involved
here that we need to be aware of? Any advice would be appreciated;
even if it means we need to keep renting. Thank you kindly.
-- Confused
 Dear
Confused,
If you're not making a down payment, then you're
being shown an 80/20 loan, where the adjustable-rate first mortgage
is 80 percent of the purchase price and the second mortgage (HELOC)
finances the remainder of the purchase price. I got the 80 percent
part to match that mortgage payment of $473.01 using a 30-year amortization
and the 4.625 percent interest rate. Without knowing the terms of
the HELOC, I can't quite match the $125 payment, but can be confident
that that's the financing structure you're being shown.
The good news about this type of financing is that
you won't have to pay private mortgage insurance on the first mortgage.
A 5/1 ARM will keep the interest rate on your first mortgage fixed
for the first five years before it adjusts annually to then current
market interest rates. The HELOC will adjust with changes in the
interest rate that the loan is priced against.
How long do you plan to be in this townhouse? If you
expect to be there for less than five years, then your primary concern
is being able to afford increases in the HELOC. The smaller loan
balance will mean smaller payment increases, but it's still an increased
cost in your monthly budget. If making these payments is a stretch
for you, then having two adjustable-rate loans isn't the right approach,
even if the interest rate on the first mortgage is fixed for the
first five years.
The HELOC is likely to have a cap that limits how
high the rate can go. Ask your mortgage lender if there is a cap
on the interest rate. Then use Bankrate's
mortgage calculator to find the HELOC payment for 7.5 percent,
8.5 percent and 9.5 percent interest rates on up to the rate cap.
If your monthly budget can't afford the HELOC's interest rate going
higher by a couple of percentage points over the time you expect
to be in the home, then this structure isn't right for you.
I've ignored the issues of an unmarried couple
buying real estate together. There's no reason it can't work, but
you should make sure to reach an understanding over the ownership
interests in the property, and by that I mean a legal understanding.
Nolo.com provides a primer on why
you should have a property agreement.
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