 Finding
the right (cheapest) mortgage
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 Dear
Dr. Don,
The question I have is something a lot of people go through. My wife and I are looking to buy our first house (condo, townhouse or single family). We plan on staying in the house five to seven years and then move on to something bigger for raising a family.
Neither one of us has great credit. We have very limited funds
for a down payment. What is the best mortgage for us that will allow
us to move into a bigger home in five to seven years while keeping
our payments as low as possible?
-- Thomas Triangulate
 Dear
Thomas,
To keep your monthly payments as low as possible you need a low
interest rate and a long loan term. An interest-only mortgage can
keep payments down as well by not requiring any principal repayment
-- at least in the early years of the loan. Adjustable-rate mortgages,
or ARMs, aren't currently much of a bargain, but a 5/1 or 7/1 interest-only
ARM would lock in a fixed interest rate over the time you plan to
be in the house and keep payments at a minimum.
The other variable in the equation, besides your poor
credit history, is that you don't have much of a down payment. Two
ways to finesse this are by either using a Federal Housing Administration,
or FHA, loan that requires a minimal down payment or by taking out
a no-equity loan.
An FHA loan allows you to finance with 3 percent down
and a less-than-stellar credit history. Program limits on the size
of the loan vary by region. A Department of Housing and Urban Development
Web
page lets you look up the limits in your region. You will pay
an upfront mortgage insurance premium and an annual renewal premium
on the insurance.
The FHA offers three types of loans: a fixed-rate
loan, an adjustable-rate loan and a hybrid loan that has a fixed
rate for the first three or five years of the loan and thereafter
is an adjustable-rate loan. Another HUD Web
page tells you more about FHA loans and has a link to local
home-buying
programs in your area. (The Federal Housing Administration is
administered by the Department of Housing and Urban Development.)
If an FHA loan isn't right for you, then consider
a piggyback loan like an 80-10-10
loan. It has a first mortgage for 80 percent of the home's purchase
price, a 10 percent second mortgage and 10 percent down. Because
the first mortgage has a loan-to-value of 80 percent or less, the
first mortgage lender doesn't require mortgage insurance.
With your poor credit history, the second mortgage
lender is going to quote you a high interest rate on that loan.
The second can be a home equity loan with a fixed rate or a home
equity line of credit with a variable rate. I'd lean toward the
fixed-rate home equity loan, but you'll have to decide after getting
the rate quotes.
You can do a no-money-down piggyback loan, but you'll
really pay in terms of the interest rate(s) quoted on these loans.
Lenders like to see the homeowner have an equity stake in the property,
especially if the homeowner has a shaky credit history. This Bankrate
feature, "PMI
industry fights back against piggyback loans," has additional
thoughts on using a piggyback mortgage. You can do a lot to improve your credit score over a year or two.
Making payments on time and keeping credit balances under control
are two ways to make that happen. Get things in shape and you can
refinance the second mortgage fairly easily with minimal closing
costs.
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