Potential 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 do an apples-to-apples comparison. Fortunately, there are tools that allow you 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, there are other types that 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 usually 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.
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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 $625,500. These have higher interest rates, and the bank might require a larger 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 in a single person. If it is new construction, at least 70% of the apartments should be in contract to pass muster with Fannie Mae.
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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 also 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.