mortgage

Do homework before choosing home loan

Don TaylorQuestionDear Dr. Don,
We are first-time homebuyers looking at a foreclosed home worth about $50,000. We have a somewhat small budget and can only make a small down payment of $1,000 or less (more like $500). We were told we should go with a 30-year, interest-only fixed-rate home loan, since we need small monthly payments and intend to sell it in probably five to 10 years.

I have no idea what to do and need advice on what home loan we should get to fit our budget/down payment and who we should go through -- a bank, lending company, etc.? Please help!
-- Matt Mortgage

AnswerDear Matt,
My first reaction is that someone who only has $500 to $1,000 for a down payment on a house shouldn't be buying a house, even if it's a really great deal. Even with an FHA loan, you're expected to make a 3.5 percent down payment, or $1,750 on a $50,000 home. Closing costs will raise the total by another 2 percent to 3 percent, although you may be able to finance part of the closing costs.

The home mortgage market is reeling from no-money down loans made in the past few years, so lenders aren't looking to add more to their books.

If you have money saved in an IRA account, taking advantage of the first-time homebuyers' provision for these accounts will allow you to withdraw up to $10,000 without paying the 10 percent penalty tax. You may also be able to borrow money against your 401(k) or 403(b) account.

I'm not sure you need an interest-only 30-year fixed-rate loan. The difference between the interest-only payment and the fully amortized payment (principal plus interest) would be about $60 a month. The typical interest-only loan becomes a fully amortized loan after a period of time, generally after five to 10 years, and your payment will increase accordingly even if you have a fixed interest rate.

It's common for an interest-only loan to have a higher interest rate than a comparable conventional loan. That interest differential would reduce the monthly savings from the interest-only option.

You can use Bankrate's compare rates feature to find today's mortgage rates for conventional and FHA loans. Forearmed with this knowledge, you don't really need to work with a mortgage broker to shop rates.

If you decide to work with a mortgage broker, I'd suggest an "upfront mortgage broker," as discussed by The Mortgage Professor, Jack Guttentag, in the Bankrate feature "Want your mortgage wholesale? Try an upfront broker."

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

News alert Create a news alert for "mortgage"

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
MORTGAGE & REAL ESTATE NEWSLETTER

Timely market news and advice for consumers ready to buy, sell or invest in real estate. Delivered weekly.

Blog

Holden Lewis

What are HUD’s priorities?

The new housing secretary delivered his first major speech since taking office. What's his top priority? He doesn't say.  ... Read more

advertisement
Partner Center
advertisement

Connect with us