With a raise from his investment firm, Seyed Abdallah, 31, is inspired to look for a new home. Buying a home will allow Seyed, who is single and in the 25 percent marginal tax bracket, to itemize taxes.He has come to you for help.

Financially he is fairly secure but is also very risk adverse. His salary is $63,000 per year, but he does not know how much he should spend on housing. His current housing expenditures include rent of $900 per month and renter's insurance premiums totaling $150 per year. His monthly bills include a $450 per month lease payment for his 2008 Acura RS Coupe and a $150 per month student loan payment. He also paid a security deposit of two months rent from which he could be earning 8 percent after taxes.

Seyed has researched the recurring costs of homeownership. He has found that the real estate tax rate is $0.91 per $100 of assessed value and homeowner's insurance policies cost approximately $275 per year. He is unsure of the maintenance costs but estimates them at $350 per year.

He likes the idea of owning his own home because as the real estate values increase the value of his home instead of his rent payment will increase. Local property values have been increasing at 5 percent per year over the last 7 years and real estate sales commissions equal 6 percent. One concern about buying a home is the immediate cost of down payment and closing costs. These closing costs, he has found, include a 1 percent origination fee, 2 discount points on the mortgage, and 3 percent of the home cost in other various fees due at closing. He also knows that he would pay a 20 percent down payment. Another concern is the lost investment income on this money that is currently earning an 8 percent after-tax return.

What four types of housing would generally be available for Seyed?

What sources of information applicable to any real estate purchase might be helpful to Seyed in making a decision? Should he consider prequalifying?

Given his risk tolerance, what type of mortgage would you recommend to Seyed? Should he consider an interest only mortgage? Why or why not?