Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a home or apartment. Additional questions welcomed to Curbed Chicago's tipline.
Right up there with marriage, a mortgage is one of life's more binding legal agreements. If you can't (or don't want to) buy a home with cash, a mortgage grants you ownership, with the home's value used as collateral against the bank's loan. Your loan will be paid over a number of years, but if you default on your payments, the property goes back to the bank in what is known as a foreclosure.
A few years ago, lenders threw mortgages around willy-nilly, making it ridiculously easy to buy a house. And we all know how that turned out. As interest rates soared and the economy sunk, thousands and thousands of Americans lost their homes. The federal government is now working to stabilize the industry, but it's still more difficult to get a mortgage than it was in the past.
To find a loan, you have a couple of options: You can go directly to a major bank like JPMorgan Chase or Wells Fargo, or visit a broker who will shop around for the best price. Before you apply, you need to figure out what you can actually afford. You can use an online mortgage calculator, like this one, to see your payments based on credit rating, income, loan type and property values. Also, familiarize yourself with these terms so it seems like you know what you're talking about:
Amortized Loans: An amortized loan has equal payments throughout the loan's duration, generally paid once a month.
Adjustable vs. Fixed Rate: The more common fixed-rate mortgage allows you to lock in your rate over a 30-year or 15-year payment period. A 30-year mortgage allows more time to pay off the loan, but the higher interest rates that come with it means that it'll cost more in the long run. On the flip side, buyers who lock in with a 15-year fixed-rate mortgage tend to get lower interest rates and they end up paying less overall. For obvious reasons, adjustable-rate mortgages (ARM) are riskier than a typical fixed-rate mortgage. Payments will begin relatively low, but once the rate is adjusted they may become harder to meet.
Debt-to-income Ratio: Debt-to-income Ratio (DTI) refers to the percentage of your total monthly income that goes towards paying debts. This will give the lender an idea of how much debt you can realistically take on. LendingTree.com says that a DTI over 36 percent will likely not be approved.
Pre-Qualified vs. Pre-Approved: Before shopping for a home with a buyer's agent, you'll need to get pre-approved for a loan. The bank will review your financial history and then agree to a loan in writing. Before the housing crash, buyers could get pre-qualified loans informally based off-their DTI.
Keep in mind, these are just the basics. Mortgages are tricky stuff and can vary greatly from one lender to the next, so be sure to check out a number of options.
Buying a Home with Cash
So you have enough money in the bank to buy a home? Good for you, Mister Moneybags! But do you really want to spend all that cash on a home? The trend is actually becoming more popular – in 2010, 23.4 percent of homes sold in Chicago were cash purchases.
The benefits of buying a home with cash are pretty obvious: You completely sidestep the mortgage process and the interest that accrues on the mortgage over the years. That's good. Though the mortgage allows you to initially acquire a home for a fraction of the price, by the end of your mortgage you will have actually paid more. MyBankTracker.com says that interest rates can double or even triple the price of a home by the time it's paid off. And if you lose your job or have financial problems for any other reason, you won't have to worry about falling behind on payments. Paying with cash can also accelerate the closing process (because you don't have to worry about a loan application or mandatory inspection).
The main disadvantages of buying a home with cash are: 1) You're spending all of your money on the house and 2) You get no tax breaks. It's not for everyone, but if you can afford to buy the home outright, who are we to tell you not to?
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