The Basics of Paying For Your House-Mortgage V. Cash

MORTGAGES


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

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 must be said.

In summation, if you can get a mortgage in this market, good for you If you can pay in cash, good for you!