I have 2 years of grad school in Raleigh NC (starting in August) and I'm considering buying a home for the 2 years. I have an excellent credit rating (above 700), and I've spoken with a lender here in Raleigh who's pre-approved me for a loan of about 300k.

My question: which type of mortgage is generally best when planning on owning for 2 years. The lender I spoke with recommends an 80/20 mortgage (zero down). These monthly payments would be about $1600. I would have to pay about $3k in closing costs. Should I try to roll the closing costs into the mortgage (seller pays). My only concern then is that I will have no equity in the home, and if I understand this correctly, if the home does not appreciate for the next two years I could really loose a lot of money when selling.

Thanks for your help

Answer # 1

Basically, the 80/20 is a good program, but it will not get you the best rate. If you can swing a 5% down payment, you will qualify for the conforming rates that you see advertised. Investors charge higher rates for the higher risk loan program that allows the 100% total financing. Could you invest the money that you would use for the down-payment elsewhere and make a greater return? Homes don't usually depreciate. I think the national appreciation average is 8%.

More than anything, I recommend a 3-year adjustable rate, interest-only loan. It is designed for short term owners and will keep the monthly payments low. If you do pay a small amount to the principal each month, you will pay the balance down faster than a standard fixed rate loan. I can prove it.

Rolling the closing costs into the loan (seller paid) is only an option if the home appraises higher than the sales price. There are some weird 107% products out there, but the rates are ugly.

Call me to discuss further 800-684-7540.

Floyd Taylor

Answer # 2

Looks like Floyd gave you the bulk of the information you need. Another consideration may be to use a 97% loan program, combined with a qualified Down Payment Assistance program to cover the 3% down payment. One advantage of the 80/20 combos is that the MI (mortgage insurance) is waived because the 1st mortgage does not exceed 80%.

The appreciation of the home is going to be specific to your area. I think a more realistic appreciation figure would be 4-5% per year, but check with a couple of realtors (ask for documented comparables and make your decision from there). Either way, you should certainly be ok in 2 years when it's time to sell. One thing to note - many lenders do not offer 3/1 ARMs for the 80/20 combos using the standard Freddie Mac or Fannie Mae program rates; so if you want the best deal, you will probably be looking at the 5/1 or 5/1 interest only products.

Jeff Russell
jrussell@barclaysfinancial.com
888-301-5626