Keller Williams Realty
[pic] |William Bein, Realtor®
KELLER WILLIAMS
2106 N Clark, Chicago IL 60614
Cell/direct: 773-510-9021; Office: 773-472-9000;
Fax: 773-345-0789; Email: BBein@ |[pic] | |Mortgage 101
Let’s start with a picture of two extremes most first-time buyers want to avoid:
|The OLD paradigm |A NEW risk: a ‘predatory’ loan |
|If your parents bought their first home more than 30 years ago, |Picture an adjustable-rate loan with a 6-month introductory |
|they remember the day when you had to have 20% down to buy—and |rate—and then no cap on how high interest rates can go. These are |
|30-year fixed was the standard loan option. Now, very few, if any, |called ‘exploding’ ARM’s (a 4.99% introductory payment could |
|first-time buyers go that route. For most people, this is too |quickly hit 12%+)—and we hope no client of ours ever falls prey to |
|conservative an option to pick. |that kind of predatory lending! |
How do you avoid these extremes? The answer must be based on:
(1) Pre-approval, (2) Down Payment / Earnest Money,
(3) Choosing the Right Type of Loan, and (4) Choosing the Right Lender.
1. Your Pre-Approval
When you talk with a lender, you may hear the term PITI (Principle, Interest, Taxes and Insurance) or, for condo’s, PITA (A=assessments)—this is your monthly payment.
|Credit Score. Most lenders regard a credit score|Documented vs. Stated Income. Many people are in|Debt / Income Ratios. A PITI/PITA max of 28% of |
|(called a FICO) above 700 as very good – and |jobs that allow for a stated (not documented) |income without considering other debt or 36% |
|anything below 600 as a problem. Talk with your |income application. The interest rate for Stated|when all other debt payments are added used to |
|lender about what your score is—and potentially |may be a little higher, but there can be extra |be the standard limit, but now you’ll find more |
|how to improve it. |flexibility in what you qualify for. |flexibility often exists. |
2. Down Payment / Earnest Money
30 years ago you COULD buy with less than 20% down, but few did. Why? With less than 20% down, you had to pay PMI (Private Mortgage Insurance), and most hated that idea. The alternative that lenders developed was for the buyer to take out TWO loans— one for 80%, the other up to 20%. But, as of Jan ‘07, depending on family income, PMI charges are now tax-deductible, and PMI may no longer be so objectionable.
|Choices |NOTES |
|20% down. With 20% (or more) down you avoid PMI and have a lower monthly payment. | |
|80 / 15 / 5. Here your cash down payment is 5%, and you avoid PMI by taking out a 2nd mortgage for 15%. | |
|(Since the first mortgage 80%, this combination is called an 80 / 15 / 5.). With 10% down, this would be| |
|called 80 / 10 / 10. | |
|0% down. A 100% loan is one option—and the only option some buyers qualify for, even though it means | |
|paying Private Mortgage Insurance (PMI). | |
|Seller Assistance on Closing Costs. Typically, in Cook County, a buyer must pay around 2% for closing | |
|costs. Lenders vary, but most allow 102 or 103% financing—with the 2% to 3% added to the original sale | |
|price to cover closing costs). | |
|Earnest Money. A $1,000 initial earnest money payment typically accompanies a buyer’s offer. A later | |
|increase to 2% is the minimum many sellers will accept, 3% is the norm, and 5% is the most buyers ever | |
|pledge. Whatever it is, it counts toward down payment and closing costs—if you’re doing 100+% financing,| |
|you may get some or all of it refunded at closing. | |
3. Choosing the Right Type of Loan
We recommend you that you sit with a good lender to explore LOTS of loan options so that you understand what is the best fit for you. ARM (Adjustable-Rate Mortgages) have pretty much won the day for first-time buyers, but you must make sure that yours is NOT too risky (predatory lenders and ‘exploding’ ARM’s should be avoided at all costs!!!).
|Category |Current rates/costs per 1,000 |NOTES |
|20-, 30- or 40-year fixed-rate AMORTIZING. Fixed-rate, |Type |Rate |$/1,000/month | |
|amortizing were once the only option. Amortizing loans | | | | |
|eventually pay off the principal, but note that very little | | | | |
|of that occurs early on—and so if you think you will sell or | | | | |
|refinance quickly, you may prefer Interest-Only (I.O.). | | | | |
| |20-yr fixed: |_______% |$______/1,000/mo. | |
| |30-yr fixed: |_______% |$______/1,000/mo | |
| |40-yr fixed |_______% |$______/1,000/mo | |
|Amortizing ARM’s. (Adjustable Rate Mortgages). More and more |Type |Rate |$/1,000/month | |
|buyers are choosing loans like a 5-1 ARM (the 5 in 5-1 means | | | | |
|the rates can’t change for 5 years—and the 1 means that then | | | | |
|they can’t go up by more than 1% per year). As 2-1 or 3-1 | | | | |
|ARM’s can be more volatile, a 5-1 or 7-1 ARM may be the | | | | |
|right choice for you. | | | | |
| |5-1 ARM: |_______% |$______/1,000/mo | |
| |7-1 ARM: |_______% |$______/1,000/mo | |
|Interest-Only (I.O.) ARM’s. Since an amortizing loan pays off|Type |Rate |$/1,000/month | |
|very little principal in the first few years, an | | | | |
|INTEREST-ONLY (I.O.) ARM might be the right choice for you. | | | | |
| |5-1 ARM I.O.: |_______% |$______/1,000/mo | |
| |7-1 ARM I.O.: |_______% |$______/1,000/mo | |
|Interest-Only (I.O.), FIXED-RATE loans. Now you can get a |30-yr fixed I.O. |_______% |$______/1,000/mo. | |
|30-yr, fixed-rate loan that is interest-only for 10 yrs | | | | |
|(after 10 years, the payment rises when it becomes an 20-yr | | | | |
|amortizing loan, but the interest rate stays forever fixed). | | | | |
|OPTION ARM. An OPTION ARM gives you payment flexibility with |Here the interest rates are not so simple to understand—and buyers should investigate |
|a negative-amortizing, very low minimum payment OR several |everything about a loan like this very carefully! |
|higher amortizing options to choose from each month. | |
|Sub-Prime (or Non-Prime). Higher-rate loans can be good if |While non-prime loans CAN be good, they also can be PREDATORY. |
|people can get into a home and then repair their credit so as|This is especially true if the loan has a low introductory rate, |
|to be able to refinance the loan within 12-24 months. |but rates can later explode. |
4. Recommended Lenders / Loan Officers
It’s important to explore all your options with a good lender. The key question no longer is “What’s your rate?”—now it’s much more “What the best fit for me?” You don’t want too risky a loan, and you will need a SOLID pre-approval so you won’t get any nasty surprises later. You want a lender you can count on for outstanding personal service, all the way to the closing table. Good lenders include:
• Metrocities Mortgage is expanding its work with Keller Williams. Clint Morgan (773-450-5979) and Trista Cottman (773-469-2666) are agents you can contact.
• Guaranteed Rate, located at 3940 N Ravenswood, Chicago, IL 60613. Contact Brian Weis (phone: 773-290-0591; fax: 773-516-5732).
• A and N Mortgage Services, Inc, located at 1535 N Dayton, Chicago, IL 60622. Contact Susie Cohn (phone: 312-543-2438, fax: 312-664-5831).
And, remember, besides a good lender, you’ll need a good inspector and a good attorney (I can help you with recommendations there as well), and, even more, you’ll need a good Realtor®. There, of course, the choice is clear… I look forward to serving you!
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