Q. I'm a first time home-buyer who has been approved for a stated income home loan of $200,000. My loan, however, comes with an 8 % interest rate. The actual home I buy will probably cost around $160,000. I need to buy this home on my own because my partner has horrible credit that would actually raise the interest rate more. And if I waited for an income based loan, it would be for a lot less money (but likely a better interest rate). Here is my question: Is it worth getting a loan now at 8 % if that is the best I can do?

A. Your 8% loan is a little more than a percentage point higher than the current average rate for a 30-year fixed-rate loan. So that's not a big penalty. If you had said 12% or 13% waiting would make a lot of sense.

Now you need to figure out how much you can afford to spend on a house with your 8% loan.

Since you are a first time home-buyer, you don't have equity from a previous house to help with the down payment.

So let's assume you buy a $160,000 house, putting $5,000 down and borrowing the remaining $155,000 with a fixed-rate, 30-year loan. At 8%, you'd have to pay $1,137 a month for interest and principal. Taxes and insurance -- including mortgage insurance, since you are putting less than 20% down -- will add at least $200 a month to that, and probably more like $300 to $400 a month.

Conservatively, your total monthly payments would be $1,337. But you shouldn't be surprised if it was more like $1,500 a month. 

The general rules lenders use to determine if you can afford a house are:

• Housing costs -- including principal, interest, taxes, assessments or any other fees -- shouldn't exceed 28% of your gross, or pre-tax, income.
• Monthly debt payments – including your mortgage, auto loans, utility and credit card bills – shouldn’t exceed 36% of your pre-tax income.
  

That means you'd need an annual income of $57,300 to $64,285 to keep those payments within 28% of your pre-tax income.

If you added just $500 a month for car payments, credit card, gas, electric and other recurring bills, that goes up to $61,233 to $66,666 a month to meet the total debt rule.

If you waited until you could qualify for a 30-year loan at the average interest rate of 6.9%, your payments would be about $117 a month less.

Now your annual income could be as low as $52,285 a year to stay within the housing cost rule, and $56,666 to stay within the total debt rule.

You didn't say how much you expect to be earning, but the biggest mistake first-time buyers make is spending more than they can afford. So work backwards from how much you expect to make to figure out the price range you should be looking at.

Q. My husband and I are trying to get a loan to build a house. We are scared to death about these interest rates going up. What about these all in one loans? They combine the construction loan and the long-term loan so that you only have to pay closing costs once and you can go ahead and lock in an interest rate? It sounds very good but I've heard that it's not because they charge a lot of other fees.

A. As with any loan, you’ve got to shop to be sure you’re getting the best deal with a “single-close” construction loan. Your interest rate on the mortgage should be comparable to the going rate on a traditional purchase, and the construction loan is generally an interest-only loan with the interest rate tied to the prime rate.

With regard to fees, most lenders claim that their fees are comparable to those charged for a traditional loan, but this is where you have to do the fine tuning. Get quotes from at least three lenders that include all fees and charges and make comparisons. And don’t be afraid to ask questions.

We recommend that you talk with lenders that have a loan officer who specializes in this type of loan. And remember that even if the fees are a little higher, the cost may still be less than getting two (or three) separate loans that would each have their own sets of fees and costs.

Have a question about your finances? Ask us at editors@interest.com.

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