"I am planning to purchase a house and sell it within one or two years. I have been advised that an interest-only loan fits this situation best. Is that true?"

An interest-only (IO) is the instrument of choice in a quick-turnover situation only if you are trying to maximize the amount of house you can buy, and are limited by your income. The IO option lowers the required initial payment, which allows you to qualify for a larger loan amount.

This is why buyers in markets undergoing strong price appreciation, who are looking for quick capital gains, gravitate to IOs – or to their big brother, the flexible-payment (option ARM), discussed next week, which has even lower payments in the first year than an IO.

The more expensive the house they can buy, the larger the expected capital gain. However, if you don't need an IO to qualify for the house you want to buy, it is not the best choice in a quick-turnover situation.

Your objective should be to minimize your total net costs over the 1-2 years you have the mortgage. Gross costs include points and settlement costs, which are paid upfront, monthly payments during the period, and interest lost on both upfront costs and monthly payments. Cost offsets that are deducted from the total consist of tax savings and reduction in the loan balance.

Whether or not the mortgage is an IO hardly affects total net costs. The payment is lower with the IO, but balance reduction, which is a cost offset, is eliminated.

To minimize total net cost over a short period, focus on finding the best combination of interest rate and rebate. A rebate is negative points, where the lender pays you for a higher rate instead of you paying the lender for a lower rate. A rebate will reduce or perhaps eliminate your upfront cost. When your time horizon is very short, paying a higher interest rate in exchange for a rebate is a good deal because you won't be paying the rate very long.

To illustrate, on Feb. 13 I visited www.mortgage.com, which is an excellent shopping site, and priced three mortgages: a 3/1 ARM, a 15-year FRM and a 30-year FRM. In each case, I selected the loan with the largest rebate and highest rate. For the 3/1 ARM, the largest rebate was .68 percent of the loan with a rate of 5.375 percent. The largest rebate on the 15-year FRM was 1.3 percent with a rate of 5.75 percent. The largest rebate on the 30-year FRM was 1.64 percent with a rate of 6.125 percent. I then calculated total net costs over two years in each case. The 15-year FRM was the winner.

I can't guarantee that every case will turn out this way. The results could be different if you shopped at different sites. Some other good ones you can try are www.eloan.com, www.indymac.com and www.mortgage.etrade.com.

My results were also affected by my tax rate, which affects tax savings, and my savings rate, which affects interest loss on upfront costs and monthly payments. However, you can adjust everything to the particulars of your personal finances using a new calculator I recently placed on my Web site, number 9d. The calculator offers an interest-only option, so if you aren't convinced that interest-only won't minimize your costs, you can test it yourself.