The number-one mistake people make regarding mortgages is not getting one: "One of the things I've personally witnessed is this paralysis in our greater society—this fear that's keeping people back from this opportunity that I don't think will exist for the rest of our lifetimes."
This is what Steve DiMarco, president of Baird & Warner Financial Services and a member of the firm's executive committee, told Windy City Times during a recent discussion about mortgages. During an exceptionally informative talk, DiMarco also helped to explain the basics of mortgage. Get ready for Mortgages 101.
Windy City Times: So what do you want to say about mortgages, especially in this economy?
Steve DiMarco: When you look at the mortgage interest rate—which is only part of consideration—but also the values of properties and the opportunities to purchase real estate because of foreclosures, it's just amazing that so many first-time homebuyers are sitting on the sideline. Even second-time buyers, who may not realize the maximum sale price that they could've a few years ago, would make that up and more by buying houses that have been discounted.
We can understand that a lot of fear comes from losing jobs. However, if there's one point we can drive home, it's that if you're part of the 90 percent who's working and you're comfortable with your cash flow, you ought to do something. Rent prices have only gone up while home prices have skyrocketed downward.
WCT: Some people are not that comfortable with being in the housing market at all—including not knowing what a mortgage is.
SD: Well, let's use a house that has a $100,000 purchase price. Who's got that kind of money sitting around? Very few people—so most people have to leverage their home purchase and use financing, a mortgage. A mortgage is nothing more than a loan that has a lien that provides security for the lender in the event of default.
The considerations for one getting a loan involve what I call the three Cs: capacity, character and collateral.
Ultimately, the reader has to be comfortable with whatever payment is required to maintain the property and to pay the real-estate tax burden. There's the individual perspective: What's this going to cost me? A big part of what mortgage lenders do today is comparing rent versus their scenarios to show people they'll be better off not only on a cash-flow basis but also on a long-term basis. What we're talking about here is dwellings, not investments.
WCT: So people need to think differently about the actual unit?
SD: I think so. This is about habitation. I am a real-estate guy and I do think there's a whole bunch of upward movement coming in pricing; it may not be this year or next year, but... There's only a finite supply of real estate; ultimately, there'll be a demand for housing.
But folks have to be comfortable with the fact that bankers will be looking at the three Cs. Capacity is related to one's income: "How much do you make? What is the source of your income?" However, the bank also looks at what obligations are out there so we know what portion is available for housing. Generally, no more than 30 percent of that cash-flow stream is going to be used for house payments, as a rule of thumb. As long as the additional obligations and the housing payment make up no more than 40 percent of the cash-flow stream, we're good.
Now character's an easy one. The lender wants to examine what your history of making payments is; it shows how you'll pay going forward. Credit score drives so many things—everybody's evaluated in the same fashion. Generally speaking, anyone who's carrying a 640 credit score or better isn't going to have a problem obtaining mortgage financing; those with 580 or better still have a shot. People can go to FreeCreditScore.com to get a free credit report. The great news is because so much capacity exists the mortgage business, lenders aren't dismissing out of hand who don't qualify; they working with people. No matter what your credit score is, there are things you can do within two hours that would improve that score. It helps to know the lenders; they can prescribe some methods to get a higher credit score—and save money.
Our third "C" is collateral, and that's for security and that's intended to be the repayment stream to the bank in the case of a personal default. The bank can sell real estate to try to [ recoup ] some losses. Banks look really closely at collateral. They want to make sure the individual is purchasing the property at a price that's reasonable to properties in the marketplace—but they also want to make sure there aren't property-specific concerns that need to be vetted out.
Someone who's interested in buying a home needs to ask "What can I personally obtain? What's my capacity?" There's so much inventory out there; you have the old and established, and the new and successful. As an industry, we have to get folks to focus on the present and to get over this fear and uncertainty.
WCT: Could you briefly talk about fixed-rate versus variable-/adjustable-rate mortgages?
SD: In a fixed-rate mortgage, the rate is fixed for the entire duration of the loan; it establishes a bit more predictability. An adjustable-rate loan is just that—it starts out at a specific interest rate and then has the propensity to change at prescribed points in the future.
WCT: Now, who might each of these loans benefit?
SD: The fixed-rate is for the individual who has a very long horizon for being in the dwelling, or who has a low aptitude for risk. Conversely, one who chooses an adjustable rate may not wish in that property for that long. The difference is that the variable- or adjustable-rate loan generally carries a lower interest rate. There are different adjustable-rate loans ( one-year, three-year and so forth ) , and they have [ different ] rates.
Right now, we're in a very low interest-rate environment. The reason for that is because the government is subsidizing so many of the bond purchases in the marketplace that interest rates are held at an artificial low right now. So my advice to any buyer who knows you're only going to be there a short while or who is facing uncertainty is to consider a fixed rate.
In future columns, DiMarco will lend his knowledge to various aspects of mortgages, including those that explicitly involve the LGBT community.
