Buying New York City Real Estate can be scary. It is likely to be the largest purchase one makes in his or her lifetime. Adding to the confusion, there are a variety of financing options. We’ll try to add some clarity to make your decision a little less burdensome.
Peculiarities of Mortgages in NYC
First-time homebuyers are often confused when it comes to obtaining a mortgage. While it is tempting to merely sign-on for the one with the lowest rate, you will be doing yourself a huge disservice. There could be various fees attached, as well as different terms. You will need to be able to make an apples-to-apples comparison. Fortunately, some tools allow you to understand the terms of your loan before signing on the dotted line.
Figure out the type of mortgage you want
Although the 30 years fixed mortgage is the most common, other types may be appropriate. You may decide to obtain a 15 year fixed mortgage. The interest rate is usually lower, and you will pay off your loan quicker, saving money in interest costs. However, the payment is generally higher. There is also various adjustable rate mortgage (ARM) options. Typically, the interest rate on loan is fixed for a period, which is followed by a floating rate that is tied to another rate, such as LIBOR or the federal fund’s rate.
A fixed rate allows you to know your monthly payments with certainty. Conversely, an adjustable rate will fluctuate, depending on the interest rate. There are several factors to consider in making your decision, including your risk tolerance, how long you plan on living in your residence (the shorter time frame means an adjustable rate might be the right choice), and your view on the economy and interest rates.
The Federal Home Loan Mortgage Corporation (FHLMC), which is commonly referred to as Freddie Mac provide average rates on a variety of mortgage products. This is a good starting point, giving you a sense of the general level and direction of rates, but this is the national average. You will need to hone your search to New York City. Keep in mind that you will have to obtain a jumbo mortgage for a loan larger than $679,650. These have higher interest rates, and the bank might require a more substantial down payment than for a conforming loan.
Co-ops, condos…oh my
New York City’s plethora of co-ops and condos means interested buyers should be aware of each one’s peculiarities when it comes to accessing a mortgage.
A co-op board may put you through the ringer, with financial disclosures and a strict vetting process. This may give the lender greater confidence. However, not all banks grant mortgages for a co-op. Furthermore, the co-op building may not allow any mortgage or allow you to finance only a certain percentage of the purchase price (e.g., only 50% of the price).
It is easier to obtain a mortgage to purchase a condo than it is for a co-op. On the condo side, you should also look at the building’s characteristics. As we noted previously, if more than 50% of the condo units are investors, banks are more reluctant to lend. A high vacancy rate and percentage of owners who are delinquent results in lenders being more skittish. If a single investor owns a large number of units (e.g., 10%), lenders may turn down your mortgage application.
Not so fast
Just because you have been pre-approved for a mortgage does not mean you will automatically get the loan. The lender will also check the co-op or condo building’s finances. Following guidelines from the Federal National Mortgage Association (FNMA, or Fannie Mae), the institution will determine whether or not the building is a safe investment. This includes an examination of the building’s reserves (10% of revenue is the guideline), any legal issues (if there is pending litigation, a bank will almost certainly not extend you a mortgage), and commercial space occupying more than 20% of the building’s square footage.
We previously mentioned a potential issue if one person owns more than 10% of the shares or units due to fear of putting too much of the property’s future in the hands of a single person. If it is new construction, at least 70% of the apartments should be in contract to pass muster with Fannie Mae.
These types of problems are discovered during the attorney review process. You can also do some of your homework beforehand by asking your buyer’s broker to see a copy of the financials, however. He or she might even be able to tell you about the presence of other issues.
Knowledge is power
The Consumer Financial Protection Bureau (CFPB) was created in the aftermath of the housing crisis. “Know Before You Owe” is a mortgage disclosure rule that replaces four forms with two: the Loan Estimate and the Closing Disclosure. The Loan Estimate makes it easier to shop around and compare different loan offers while the Closing Disclosure provides notice to avoid surprises at closing.
When shopping for a mortgage, there are other considerations. Look at the fees each lender is charging. To accurately compare lenders, use the annual percentage rate (APR). You may also want to consider paying points, or upfront interest, to obtain a lower rate, depending on how long you plan on living in residence. These are all part of the closing costs, which are typically 2%-5% of the purchase price, and include title insurance, title search, government and escrow fees, home inspection, and an appraisal, along with any points you may decide to pay.
Don’t get overwhelmed by the process. There are mortgage brokers that can help you shop for the best rate, and your buyer’s broker should also be able to explain the basics.
There is a fixed rate mortgage
This gives comfort since the interest rate on your loan will never go up for the entire term, meaning your mortgage payment (principal and interest) will not change. But, if you pay property taxes and insurance through your monthly payment, these will change. Of course, this is a double-edged sword. If rates go down, your payment will not, unless you refinance.
A mortgage can be for a variety of lengths
A common mortgage is for thirty years, but there can be ten, fifteen twenty, even a forty year (the longest we’ve seen), or some other term. It is important to keep in mind that the longer the mortgage, the lower your payment, despite a higher rate, generally speaking. But, you will pay more in interest over the life of the loan.
A short numerical example will illustrate the point
Using the website bankrate.com, and plugging in the Metro New York area, it returns some banks offering mortgage rates. Bank of America has a 4.15% interest rate. Assuming a $500,000 mortgage, your monthly payment will be $2,430.52. Over the life of the loan, you will pay $374,985.98 in interest. Most of the interest will be paid in the first half of the loan. If you prepay a portion, you can reduce the number of years, and the interest paid.
Examining 15-year rates, there are two available at 3.125%. Using the same $500,000 mortgage, the monthly payment for principal and interest is $3,483.05. This is $1,052.53 higher than the 30-year mortgage, despite an interest rate about 1% lower. But, the total interest paid over the 15 years is $126,948.41, almost $250,000 less than the 30 years.
Which is better?
It comes down individual preference and personal finances. While it is easy to jump at the 15-year mortgage in our example, which has the added benefit of owning your home in half the time and save interest charges, the monthly payment is much higher.
There is a way to lower your interest rate, besides having a high credit score. You can pay points, which involves a trade-off. Each point is 1% of the mortgage amount and paid upfront at closing. For our $500,000 mortgage, paying 2 points would equate to $10,000. In exchange, you receive a lower interest rate on your loan. If you plan on staying in the house for some years, this could pay off. Your monthly payment would be lower, and after a certain amount of time, you will recoup your upfront payment, and then the savings kick in.
Banks will quote an APR (Annual Percentage Rate), in addition to the interest rate. This can create confusion, but the payment is based on the interest rate, not the APR. But, the latter is important for comparison purposes. It allows a borrower to compare loan terms on an apple-to-apple basis. It includes fees and other costs associated with the loan. These typically include items such as points paid upfront, application fees, and a property appraisal.
There are also adjustable rate mortgages (ARM)
As the name suggests, the rate floats, usually based on a short-term benchmark such as one-year Treasury securities, the Cost of Funds Index, or LIBOR. A margin, usually constant, is then added to the index rate. There is a period where the rate will not change, called the adjustment period. After that, the rate will change based on the benchmark stated in the contract. Although the interest rate is typically lower than a fixed rate mortgage initially, it usually increases. Also, the borrower bears the risk of a rise in interest rates. This should be kept in mind since interest rates are currently very low, meaning an increase at some point appears inevitable.
There might also be caps, limiting how much the interest rate can rise from one period to the next or over the life of the loan. Another type of mortgage is a hybrid, which is a loan with a fixed rate for a period, which then changes to a variable rate. There are many varieties, such as interest-only ARMs.
For New Yorkers, there are special considerations for co-ops and condos. First, the board may examine your financial information closely. Co-ops and condos may also require a larger down payment, along with sufficient liquid assets. Mortgage rates from banks may be higher, as well.
10 Questions to ask before deciding on Mortgage Bank or Broker
Most buyers seek pre-approval with their chosen lender before making an offer on a property. Once your offer is accepted and the contract is signed, it’s time to complete your mortgage application package and choose the right home financing product. These questions will help you make an informed decision about your mortgage.
1. What mortgage products do you offer?
Since the real estate crisis, most lenders offer three main types of mortgages: Fixed rate mortgages of 15, 20, and 30-year terms, adjustable-rate mortgages, or ARMs, where the interest rate fluctuates over the life of the loan or hybrids that combine a period of fixed rate mortgage, typically from three to ten years, with the remaining years at an adjustable rate.
2. Which mortgage product do you recommend for me?
Ask your lender to discuss the advantages and disadvantages of available mortgage loans.
3. Are rates, terms, fees, and closing costs negotiable?
Can I use discount points to buy down my interest rate? A point costs 1% of the mortgage amount, paid upfront, in exchange for a reduction of the interest rate over the life of the loan. In some cases, buying down your interest rate can save tens of thousands of dollars over the life of your loan.
4. What is your policy regarding private mortgage insurance (PMI), and how much does it cost?
PMI is usually required if your mortgage amount is more than 80% of the value of the home. Most lenders will let you drop PMI once you’ve built up enough equity, but be sure to ask your lender’s policy.
5. Will, you service the mortgage yourself or is it contracted out to a third party?
6. What are the escrow requirements for my loan? Most lenders pay your property taxes and homeowner’s insurance premiums using money collected each month in addition to the principal and interest payments and held in an escrow account until the tax and insurance payments are due.
7. How long is the lock-in period?
Will my rate go down if interest rates drop during that time? During the lock-in period, the lender will honor the quoted interest rate even if rates go up.
8. How much is the penalty if I should need to extend the rate lock?
There could be times the Co-op board approval process may exceed your rate lock period so knowing the penalty or whether you should extend is crucial to understand.
9. Do you charge a penalty if I prepay the loan?
If you plan to sell your home in three or four years, it’s important to understand the lender’s prepayment policy.
10. How long will the loan process take?
The average time to close a loan is 45-60 days.
Tips for Finding the Best Mortgage Rate
Follow these tips for securing the lowest possible mortgage rate.
Polish Your Credit Score
Your credit score is based largely on your outstanding balances (generally 30 percent) and payment history (typically 35 percent). FICO, reserves the right to change these percentages based on your credit history, but you do have some control over what a creditor sees when you apply for a loan.
The best thing you can do to polish your credit rating is to establish a healthy track record. The longer you’ve been paying bills on time and avoiding collections, the better. If you can’t pay a balance off completely, dissolve as much of the debt as you can. A good rule of thumb is that your outstanding balance should equal less than one-third of your credit limit.
Flex Your Bargaining Muscle
Shopping for a lender can have you reaching for the Tylenol, but don’t settle for the first rate you’re offered. Lenders are still trying to recoup the losses they’ve incurred over the past seven years, and the competition for new mortgages is fierce. Ask some candidates to give you a good faith estimate of closing costs, then compare the figures and make your choice.
Once you decide which lender you’d like to work with, negotiate every dollar you can – it all adds up in the long run.
Certain bank fees are non-negotiable, like the appraisal and credit report. Other amounts, like your application and processing fees, could be argued down. Going with a non-escrow plan also saves you cash up front, though you’ll still eventually have to pay those taxes.
Play the Rate Lock Game
Interest rates fluctuate throughout the day, so no matter when you lock in your rate, you’re taking a gamble. Don’t take a blind risk; take a calculated one.
You can choose a 90, 60, or 30-day rate lock. The longer you lock your rate, the higher it’ll be. On the flip side, the longer you lock your rate, the more time you’ll have to get your affairs in order and find the perfect home. Base this decision on personal circumstances such as where you’re living now and whether you’ve already found your house. No matter what you do, be sure to ask for a “float down” stipulation so that if rates fall during the locked period, you’ll get the lowest rate.
The road to real estate ownership can be a bumpy one, but the mortgage process will be a lot smoother if you find a lender you can live with. The fluctuating housing market taunts potential buyers with its uncertainty, but one thing remains constant: You have some control over the mortgage rate you end up with, and you should make every effort to seize that control.
Finalizing Your Mortgage
Obtaining a mortgage can be a confusing and very stressful process, particularly for first-time homebuyers. Lenders seem to hold the power of whether your dream will come to fruition, determining how much you can borrow and what your interest rate will be. However, by shedding knowledge on the process, we hope to ease your mind and put the decision-making power back in your hands.
The Loan Estimate
When applying for a mortgage, the first step is to request a Loan Estimate, a form that went into effect in October 2015. It is three pages, and the lender must provide it to you within three business days of receiving your application. The form contains important information, such as the estimated interest rate, monthly payment, and closing costs. In the wake of the housing crisis, the document is designed to be written a note in clear English to be clear.
Six key pieces of information are required to receive a Loan Estimate: name, income, social security number (to complete a credit check), the address of the home you plan to purchase, an estimate of the home’s value, and the amount you intend to borrow.
Official documents are not required to obtain a Loan Estimate, although the Consumer Financial Protection Bureau (CFPB) recommends you do so to get the most accurate estimate possible. You should also request a loan estimate from several lenders. This will give you different options to compare to choose the best loan.
Assuming you are happy with the loan terms from one of the lenders, you need to inform one of them that you are ready to go forward with a loan application. This is typically done within ten business days. Otherwise, the lender can alter the Loan Estimate or start the process again. You may be asked to provide additional documentation to verify the information you have submitted. The lender will decide on whether to approve or deny your loan application.
Typically, lenders will ask for several records. These can be broken down into income and assets/liabilities. It will behoove you to have these on hand before your loan application. On the income side, the list includes two years worth of W-2s and income statements/1099 forms for self-employment income, recent pay stubs, and at least your last federal income tax return. To verify your debts, lenders will ask for a list of all loans, such as credit cards, student loans, car loans, and personal loans. To prove your assets, statements from your bank, mutual fund, brokerage, and retirement accounts (e.g., 401k and IRA) should be made available upon request.
There are two important ratios lenders use to determine how much to approve for a loan, at least on a preliminary basis. One is the ratio of monthly housing costs to monthly income and the second is the debt to income.
In the first ratio, lenders will typically limit housing costs to 28% of your monthly income. For debt to income, your monthly debt serving costs should not exceed 35% of your income.
Check your credit
While it is wise to check your credit regularly for blemishes, this is particularly pertinent if you are applying for a mortgage. You should check your credit report with all three credit agencies, giving yourself ample time to correct any discrepancies.
The mortgage process does not have to be a daunting process. Armed with some basic information, and being well prepared with your paperwork, you will likely find the process much smoother than you expect.
- Peculiarities of Mortgages in NYC
- Figure out the type of mortgage you want
- Co-ops, condos…oh my
- Not so fast
- Knowledge is power
- There is a fixed rate mortgage
- A mortgage can be for a variety of lengths
- A short numerical example will illustrate the point
- Which is better?
- There are also adjustable rate mortgages (ARM)
- 10 Questions to ask before deciding on Mortgage Bank or Broker
- 1. What mortgage products do you offer?
- 2. Which mortgage product do you recommend for me?
- 3. Are rates, terms, fees, and closing costs negotiable?
- 4. What is your policy regarding private mortgage insurance (PMI), and how much does it cost?
- 5. Will, you service the mortgage yourself or is it contracted out to a third party?
- 7. How long is the lock-in period?
- 8. How much is the penalty if I should need to extend the rate lock?
- 9. Do you charge a penalty if I prepay the loan?
- 10. How long will the loan process take?
- Tips for Finding the Best Mortgage Rate
- Polish Your Credit Score
- Flex Your Bargaining Muscle
- Play the Rate Lock Game
- Finalizing Your Mortgage
- The Loan Estimate
- Important ratios
- Check your credit
- Final thoughts