Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a home or apartment. Additional questions welcomed to firstname.lastname@example.org. Up now: Paying for it. Plus, realtor Alicia Cervera Lamadrid's expert advice on paying in cash.
Typically (and Miami is anything but), most people buy their property with a mortgage loan. The rest pay in cash. 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.
Condos are co-ops 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 (just without land attached) 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. We don't have many Co-ops down here (it's kind of a New York thing), so you probably don't need to worry about those much.
Miami, and specifically Miami now, is a pretty different ballgame. Most residential real estate purchases being made now are, shockingly, in cash. Because of the Great Recession, and especially that massive real estate bubble and crash that South Florida just lived through, banks are still extremely nervous about lending money for residential real estate in Miami. (Not to mention that huge backlog of foreclosures clogging up the court system) You'd think this would spell doom for our real estate market, but that's not the case at all because here come the wealthy internationals!
Miami is now considered by many as a global safe haven to park your cash. The city is seeing a large increase in second, third, and fourth home purchases by wealthy foreigners from less politically or economically stable environs, many of whom consider it perfectly normal to buy their real estate mostly or entirely in cash. Miami's new jet setters are coming from all over, but the some of the biggest countries of origin include Brazil, Argentina, Venezuela (Hugo Chavez's death = not necessarily a good thing for Miami real estate if everyone starts going back to Venezuela) Russia, and even India. Even now, a luxury condo in Rio is more expensive, and harder to finance, than one in Miami Beach.
But all that is for an upcoming Curbed U lesson, when we talk about how to get into the Miami housing market if you're a foreign national. For now, just the basics of mortgages and paying in cash.
Say you're just an average Americano, you don't own a few thousand acres of coffee beens back home, and well, back home is just the good ol' U.S. of A. You'll probably want to get a mortgage if you can. (and in more sane economic times, you will be able to) So, 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 like Wells Fargo, Bank of America, and JP Morgan.
You can pretty much find a mortgage calculator anywhere (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, of course, carries much more weight when you're making an offer on a house than just a pre-qualification. This letter has an expiration date, so make sure you know your timing.
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 IN CASH
Realtor Alicia Cervera Lamadrid has a few pointers on the ins-and-outs of buying your real estate in cash.
The thing to remember is that your cash needs to stay in the bank. It's not a good idea to walk around with cash. It isn't safe and it won't be accepted by any ethical professional entity you are dealing with. If someone is taking your cash, don't give it to them. The transactions are done from bank to bank. Checks are certainly good as a source of deposit but when it comes to the closing table if you are buying property the best way is by wire transfer. You should know in advance of your closing how much money needs to be transferred, and the seller will provide wire instructions so it can go to one bank from the other. For smaller dollar figures (less than a few thousand) you can use a personal check but in most cases - in the absence of a wire transfer - you can use a cashier's check. However, wire transfers are replacing checks more and more.
The process is exactly the same for foreign buyers, except that I recommend that foreign buyers open a local bank account so the local bank can do the wire transfer on the same day to the closing agent. In some cases, depending upon the country of origin, wire transfers from a foreign bank can take more than three days. Generally with foreign banks the wire transfer is not an instantaneous transaction.
Basically, if you're paying in cash, especially if it's coming from another country, the primary concerns are security and timing. And, preferably, a wire transfer from a U.S. bank is the way to go. Never, ever carry around suitcases full of cash. That may seem obvious, but this is Miami people.
In summation, if you can get a mortgage in this market, good for you (last we heard, rates were fabulously low when you could get 'em). If you can pay in cash, good for you. If neither is the case, c'est la vie.
Curbed NY's article on the same topic is used for the mortgage definitions in this article.
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