KMC Realty Corp







Kathleen Cordes

312-604-9002

 

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, they remember the day when you had to have 20% down to buy—and 30-year fixed was the standard loan option. Now, very few, if any, first-time buyers go that route. For most people, this is too conservative an  option to pick.

Picture an adjustable-rate loan with a 6-month introductory rate— and then no cap on how high interest rates can go. These are called ‘exploding’ ARM’s (a 3.99% introductory payment could quickly hit 12%+)— and we hope no client of ours ever falls prey to 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 (called a FICO) above 700 as very good – and anything below 600 as a problem. Talk with your lender about what your score is—and potentially how to improve it.

Documented vs. Stated Income. Many people are in jobs that allow for a stated (not documented) income application. The interest rate for Stated may be a little higher, but there can be extra flexibility in what you qualify for.

Debt / Income Ratios. A PITI/PITA max of 28% of income without considering other debt or 36% when all other debt payments are added used to be the standard limit, but now you’ll find more 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, 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.).

Type

Rate

$/1,000/month

 

20-yr fixed:

30-yr fixed:

40-yr fixed

_______%

_______%

_______%

$______/1,000/mo.

$______/1,000/mo

$______/1,000/mo

Amortizing ARM’s. (Adjustable Rate Mortgages). More and more 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.

Type

Rate

$/1,000/month

5-1 ARM:

7-1 ARM:

_______%

_______%

$______/1,000/mo

$______/1,000/mo

Interest-Only (I.O.) ARM’s. Since an amortizing loan pays off very little principal in the first few years, an INTEREST-ONLY (I.O.) ARM might be the right choice for you.

Type

Rate

$/1,000/month

5-1 ARM I.O.:

7-1 ARM I.O.:

_______%

_______%

$______/1,000/mo

$______/1,000/mo

Interest-Only (I.O.), FIXED-RATE loans. Now you can get a 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).

30-yr fixed I.O.

_______%

$______/1,000/mo.

OPTION ARM. An OPTION ARM gives you payment flexibility with a negative-amortizing, very low minimum payment OR several higher amortizing options to choose from each month.

Here the interest rates are not so simple to understand—and buyers should investigate everything about a loan like this very carefully!

Sub-Prime (or Non-Prime). Higher-rate loans can be good if people can get into a home and then repair their credit so as to be able to refinance the loan within 12-24 months.

While non-prime loans CAN be good, they also can be PREDATORY.
This is especially true if the loan has a low introductory rate,
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, located at 343 W. Erie St. Ste. 1, Chicago, IL 60610. Contact Clint Morgan (phone: (773) 450-5979; fax: (312) 279-4497).

·         Mortgage Bancorp Services, Inc., 800 E. Northwest Hwy. #100 Palatine, IL 60074 Contact Joanne McGinnis (phone: 847-776-5357, fax: 847-776-6518).

 

·         Professional Mortgage Partners, Inc. , located at 3317 W. Irving Park Rd | Chicago, Illinois 60618. Contact Tom McGrath (phone: 773-818-3004; fax: 773-496-3877).

 

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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