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Amortization

Types of Chicago Mortgages by Amortization

Like the rest of the country, mortgage loans in Chicago have either fixed or variable rates.

The fixed-rate loans offer the security that comes from knowing what the monthly payments are going to be throughout the life of the loan.  The variable-rate loans have the advantage that they offer a lower interest rate in the beginning.

Either type can be amortized over any number of years; however, amortizing loans over 30 and 15 years is far more common than amortizing them over any other period.

Fixed-Rate Mortgage Loans in Chicago

Till a few years ago, loans were amortized over 10, 15, 20, 25, 30, and 40 years.

The 40-year amortization has fallen out of favor since the advent of the Qualified Mortgage Rule (Dodd-Frank, 2014).  And, in the last few years, lenders have started to offer loans amortized over any number, 27, 22, 17.

If you’re interested in getting a fixed-rate mortgage, call 847-235-6221 now and let’s talk.

Why 30 Years When So Many Chicago Houses Are Over 100 Years Old?

The advantage of amortizing a loan over a long period of times is the smaller monthly payments.  The disadvantages are:

it takes longer to be rid of the mortgage and

the interest rate is a bit higher.  (More things can go wrong in 30 years than in 10.)

And, obviously, the reverse is true: short period amortization comes with higher monthly payments, lower interest rate, and, of course, the loan is paid off in a short period of time.

How can the interest rate be lower but the payments higher?

The principal has to be paid in a shorter period of time, that’s how.

Why 30?

To answer that, you have to go into the remaining economic life of houses.

A brand new house has some 70 years of remaining economic life.  A lender could amortize a loan over 65 years and still be sure that if the borrower defaulted in year 49, there would be more value in the house than whatever the borrower owed.

But not all houses are new.  So, to be sure that there’d be value left in the house they’re lending against, lenders hedged their bets, so to speak…  They want the largest possible number of people to afford their loans and they want to not risk ending up with a house that’s worth less than borrower owes on it.

A house with 30 remaining economic life in it at the beginning of the loan seemed like a good bet.

Variable Rate Mortgage Loans in Chicago

The common ones are the 1/5 and 1/7.  That means that the loan is for 5 and 7 years, respectively and that the rate is fixed for the first year and can change (up or down, depending on what the index it is tied to does.  Often, the rate of ARM’s (Adjustable Rate Mortgages) are tied to the Libor or US Treasury Bills.

And, Chicago ARM’s are like ARM’s all over the country.  They have life-time caps and yearly caps.  That means the rate can only increase so much over the life of the loan and only so much year-to-year.

If you’re interested in getting an ARM, call 847-235-6221 now and let’s talk.

The Damage ARM’s Have Done To Chicago Home Owners

Over the years, many a Chicago home owner’s ended in trouble, sometimes even foreclosure, because of an ARM.

It was not the ARM’s fault.

ARM’s are a financial tool.  If used properly, they produce good to great results.  If, on the other hand, they are not used properly, the results can be terrible.

People who could not afford a particular loan, took out an ARM.  Because they could afford the payments in the initial, lower interest, period of the ARM.  But they did not have an exit strategy, nothing but hopes that they would have more money because time would have passed.

That is the wrong way to deal with ARM’s.

And since the mortgage meltdown of 2008, lenders are more careful as to who they give ARM loans to (for instance, these days – May, 2016), you can get an ARM if you qualify for the initial low rate + 2%.

The Right Way to Deal with ARM’s

If your ARM’s cap is 9.5% and you can qualify for a loan with a 9.5% the day you get that ARM, you’re good to go.

If you’re using an ARM to buy / refinance a property that you will sell before the ARM adjusts for the first time, you’re good to go, if there’s enough equity in the house that you could sell it fast by that time.

The Sometimes Right – Sometimes Wrong Way to Deal with ARM’s

The future holds more money.

I’ve dealt with all kinds of people throughout the Chicago area.  Most are certain that in 3 or 5 or 7 years they will earn more money.  And many people do, indeed, end up earning more money.

But not every one.  Plus, of those who earn more, some do not earn enough to make the monthly mortgage payments on their ARM’s and not hurt.

If you’re among the people who want an ARM now because you can’t afford the loan you want now but will be able to afford it and more in a couple of years, it’s a good idea if your reason for thinking you’ll have more money is sound; it’s a bad idea if you’re reason is hopes.

If you’re interested in getting an ARM, call 847-235-6221 now and let’s talk.