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Mortgage Basics (And When to Just Pay All Cash)

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Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a home or apartment. Additional questions welcomed to tips@curbed.com. Up now: mortgages (and when to avoid them).

Though NYC does have the most millionaires in the country (take that, L.A.!) many, many people buy their property with a mortgage loan. (And with current market rates, all those millionaires are looking twice.) At its simplest, a mortgage is when you use your property as collateral against the loan taken to purchase it. The borrower owns the property, but the lender has a lien on it until the loan is paid off. Buyer defaults, lender forecloses, no one is happy. The buyer signs the note, promising to pay back the money and adhere to some other common sense things like paying real estate taxes and insurance and keeping up repairs on the property.

Co-ops and condos are very different, so of course the mortgages taken for them are a little different too. When you buy a condo, you’re buying real property which can be used as collateral, but the shares of a co-op are not as concrete as that, so a mortgage for a co-op is actually a financing loan.

Where does one get a loan? Usually people start by browsing mortgage providers online, but also can go to institutional lenders (banks), credit unions, insurance companies, the seller of the property, and largely, mortgage bankers. Mortgage Daily has listed, Wells Fargo, Bank of America, and JP Morgan as the biggest residential mortgage lenders.

You can pretty much find a mortgage calculator anywhere (Here! Here! Here!) so let's move on to your basic mortgage vocab lesson for today:

Amortized Loans: Most mortgages are “amortized loans” where equal payments (usually monthly) of the principal and interest are made over a certain period (usually 15 to 30 years). The payments cover both the principal and the interest.

Adjustable vs. Fixed Rate: An adjustable-rate mortgage (ARM) changes the monthly payment based on fluctuating interest rates and usually offers a lower interest rate. A fixed rate mortgage locks in the payment and interest rate for the length of the mortgage. If you can lock in a mortgage at a low fixed rate, woohoo! You win. Interest rates are set by state laws, and charging over that rate is usury.

Pre-Qualified vs. Pre-Approved: Pre-qualification is when a mortgage broker informally lets you know how much money you can borrow based on factors including your debt-to-income ratio (see below). Pre-Approval is a more intense process where you have to submit financial documentation and then the lender will agree to the loan in writing in a commitment letter. This letter has an expiration date, so make sure you know your timing, because you’ll also have to include it in any board package.

Debt-to-income Ratio: Basically, the percentage of your gross monthly income that goes towards paying your debts. These could be housing related (rent, mortgages, etc.) and debts like school loans and car loans. Use this calculator to figure out some more details.

Point: Points are packets of extra prepaid interest payments that equal 1 percent of the loan amount. Do you get points for being bad? Some mortgage plans might lower the interest rate in exchange for extra points paid upfront, which is known as a buydown. Some buydowns don’t last for the whole loan but rather for just the first few years, while others last the whole loan.

Remember, this is just very basic info?mortgages are complicated to the average Joe, but explained in much more detail by a professional. Do some scouting, get a recommendation and call up a mortgage broker for the whole shebang.

Paying Cash Vs. Taking Out a Mortgage
Of course, sometimes it's not necessary to take out a mortgage at all. We rounded up some knowledgeable folks for a cash vs. mortgage mini state o' the market roundtable. Let's see what our panel had to say:

“If you can take a mortgage, take it, as we have now historically low interest rates and the interest on the mortgage is tax deductible,” says Jacky Teplitzky of Prudential Douglas Elliman. “Since most of the buyers in NYC are in very high tax bracket, anything you can deduct and pay less in taxes is good for you. I always say better keep more money in your packets then pay Uncle Sam.”

Verdict: MORTGAGE.

“It depends on individual’s situation, but it’s very hard to imagine anyone NOT borrowing money at current rates,” says Douglas Heddings of Heddings Property Group.  What are the pros and cons of each?  “With all cash, you obviously have no mortgage payment, but you also don't have the tax deduction from the mortgage.  With a mortgage you have an extra monthly expense, but you have a huge tax deduction on amounts up to $1M.” He adds:  “...and rates are sickly low right now!”

Verdict: MORTGAGE.

Of course, not everyone has to take out a mortgage. Victoria Shtainer of Elliman says most of her international buyers prefer to buy with cash. She says, “Since the market changes week to week and even day to day, it’s a very volatile thing.” She also mentions that since the rates are so low, sellers are pulling away from their will to sell, and instead just refinancing their homes. “I think it’s even going to happen more and more,” she concludes.

Verdict: CASH.

Jonathan Miller of Miller Samuel Appraisals sums it up with this. “It depends on your financial situation and personal preference.  Anecdotally we are seeing more "all cash" purchases than ever before.  This is likely due to two factors - 1) significant accumulated wealth/cash for high wage earners during the credit boom and 2) some of the tightest mortgage lending underwriting in decades.  We have observed that many buyers sought to take advantage of significant discounts from market peak and resolved that tight underwriting is due to past lender transgressions and don't want to wait for lenders to catch up to present day.  They may opt to refinance in a few years when credit eases.  Mortgage rates are at historic lows but volume is not as high as the low rates would infer because the lending net is not cast nearly as wide as it was before.”

Let’s break it down quick:

Pros of Cash:
· You own it, free and clear!
· No interest!
· Perhaps an easier time getting into a building with no strings attached.

Pros of Mortgage:
· Tax benefits!
· “Sickly Low Rates!”

Weigh the pros and cons for your financial situation and decide what works best for you.
· Curbed University archive [Curbed]
· Co-ops vs. Condos vs. Condops vs. Pied-a-Terres [Curbed]