Mastering the Mortgage

Mastering the Mortgage

After graduating from college, Jose takes a job in Chicago, IL. The days of renting apartments are over for him. “Homeownership is a great American dream,” says his father. For once, Jose thinks his father is right. The money he would pay for renting an apartment could be better used for buying a home. The upsides are many: homeownership provides the basis for a stable life, the right to customize the place, and perhaps a reasonable return on investment due to appreciation in home value. However, Jose is also concerned that a mortgage will “lock” him into fixed monthly payments and wants to get a clear picture of the costs and loan payments that will have to be made over the life of the loan.

Chicago and its metropolitan area are not designated high-cost of living areas, as defined by HUD and FHA, meaning that a conforming mortgage (one guaranteed by the government and presumably less expensive to the borrower) is capped at a loan amount of $417,000. Additionally, conforming loans typically require a 20% down-payment. Jose does not want to purchase a jumboloan or non-conforming loan, as he recalls reading that spreads on these loans are large.

By the end of the next bonus cycle in 9 months, Jose expects to have saved nearly $100,000 available for a home purchase. This suggests he can buy about a $500,000 home and still get a conforming loan. He calls the local mortgage lender, who offers him a conforming 30-year 6% annual interest fixed-rate loan. Jose likes this product, as the interest rate and his monthly payments will not change over the life of the loan.

Still, the loan rate and its availability are subject to a credit check, application process, and the identification of a house to buy. Jose has just begun thinking about buying and will not have his bonus money and down payment money for at least another 9 months. He reads projections from economists that are