Curbed University: We guarantee it to be the most non-boring expert advice you have ever gotten about buying, selling and renting a home in the Hub (not a guarantee). Additional questions welcomed through the ever-trusty tipline.
Let's assume you're not going to pay cash for that $450,000 JP single-family or $600,000 Back Bay 2-BR. You need a mortgage (and you need to be clear about what you're buying and why—see yesterday's lesson).
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, JPMorgan, Citigroup and GMAC 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, you win. Interest rates are set by state laws, and charging over that rate is illegal.
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 toward 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.
All-Cash: Exactly what it sounds like—you pay the agreed-upon sales price, and all sorts of hassles fall away, including interest charged on a mortgage.
Remember, this is just 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.