The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

Your guide to mortgages in New York City

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When you purchase real estate in New York City, you will have to borrow money from a lender and obtain a “mortgage loan.” Obviously, this is unless you have a lot of cash in the bank and are incredibly wealthy. Getting a mortgage in New York City puts what’s called a “mortgage lien” (the right to take possession) on the property. The lien remains in place until the buyer pays the loan in full. This includes paying back the original amount borrowed (“principal”), as well as the interest. Interests are simply the amount the bank charges to borrow money. In this blog post, we will write about all sorts of mortgages in New York City.

Interest rates on mortgages in New York City are much lower than on other types of loans. However, mortgage loans are for very large sums of money borrowed over extended periods of time. Therefore the total amount of interest paid is substantial. Sometimes, the interest rate and the length of the mortgage term can represent more than the principal amount before the loan is paid in full.

Mortgages in New York City: Fixed-rate mortgages

Fixed-rate-mortgageA fixed-rate mortgage means that both the interests and the monthly payments remain the same throughout the life of the loan. In the end, the mortgage is paid in full or “fully amortized,” provided that you have complied with the terms of the loan. For fixed-rate mortgage loans, the percentage of your monthly payments applied to principal and interest changes over time.

In other words, as you pay off the principal, the amount that goes to interest is lower. Also, the amount that goes to the principal is higher. As such, the loan will get completely paid off at the end of the loan term. With this type of loan, making additional payments will reduce the principal amount faster. This will also reduce the time it will take the buyer to pay off the loan.


Mortgages in New York City: Adjustable-rate mortgages (“ARM”)ARM mortgage

An adjustable-rate mortgage (ARM) is a mortgage for which the interest rate can change throughout the life of the loan. There are several ways an ARM get built, and the mortgage note will lay out the terms of the mortgage.  Overall, the interest rate for an ARM is tied to an index. The index could be the federal treasury bond rate or other national rates. However, it’s important to remember that the lender has no control over the index. In any event, as the index changes, so does the borrower’s rate.

All ARM loans are subject to two limits: an annual cap and a ceiling.

The annual cap is the limit of how high the interest rate increases in a year. For example, an ARM may state that the interest rate can increase by only 2 percent per year.  An ARM is also subject to what’s called a lifetime ceiling or cap. This places a ceiling on how high the interest rate can rise to, regardless of how high the index goes. So, for example, the buyer starts out with a total rate of 5 percent and the lifetime cap is also 5 percent. That means that the highest the rate can be is 10 percent, no matter how high the index goes.

ARM became unpopular after the 2008 housing crash.

However, an ARM mortgage represent a good idea for some buyers, especially homebuyers who don’t expect to live in their homes for 30 years. For example, imagine an ARM mortgage loan where the rate is fixed for the first five years. Then the buyer can take advantage of the lower interest rate and pay the loan like its a thirty-year mortgage to build up equity faster. As such, at the end of the five years, if the buyer sells the property, they will have more equity. As a result, they will make a more substantial profit at closing. Overall, borrowing on a 30-year term to finance a home that you plan to live in for just five or ten years means that the buyer will pay thousands of dollars more in interest. As a result, the buyer will have less equity in their house when they sell it.

Lastly, there is always a chance the interest rate can decrease at the end of the five years, and the borrower can refinance the loan into a more favorable term.


Balloon mortgageballon mortgage

A balloon mortgage loan is where a portion of each monthly payment goes to paying off the principal and the interest. However, at the end of the loan, the principal amount will not be paid in full. As such, the buyer is required to make a large payment (“balloon payment”) to satisfy the loan. One advantage of these types of loans is that the interest rates are typically low, making the monthly payments more affordable. As an obvious downside, the buyer must plan and/or save so that they can afford to pay off the balance when it becomes due. While rare, some buyers use this type of loan to buy a house in NYC.


Interest-only mortgageinterest only mortgage

An interest-only mortgage is a type of loan is where the buyer is only paying off the interest of the loan. Frequently, loan payments are relatively low and are manageable for first-time home buyers. This interest-only option typically is for less than ten years. When the 10-year term is up, the buyer can refinance into a new standard loan. The buyer can also renew the interest-only loan.


FHA loansMortgages in New York City: benefits of FHA loans

The Federal Housing Administration, or FHA, is a government agency under the supervision of the US Department of Housing and Urban Development. It’s important to note that FHA does not directly make loans. Instead, the agency insures loans that are made by primary lenders. Although the FHA offers several programs, the 203(b) loan is the most commonly used one. The name “203(b)” refers to the section of the law that governs such loans.

For a property to qualify for an FHA loan, it must be owner-occupied or a one-to-four-family house. That means that co-ops do not qualify for FHA loans. You can buy a condo with an FHA loan, but only a limited number of condos are actually FHA approved in New York City. Down payments can be as low as 1.25 percent for lower-priced homes and up to 3.5%.

The downside to FHA-backed loans is that they have a high loan to value (LTV) ratios. If the buyer is putting less than a 20% down payment, he will also need to pay at closing a fee called a mortgage insurance premium (MIP). This fee remains based on a percentage of the loans. The program also requires that an FHA-approved appraiser make an estimate of the property’s value. Lenders may not charge a prepayment penalty for an FHA loan.


Mortgages in New York City: SONYMA loansSONYMA loan

For buyers who qualify, based upon their family’s income level, The State of New York Mortgage Agency (SONYMA) offers a few mortgage programs explicitly designed to help first-time homebuyers purchase homes. The programs offered by SONYMA are often desirable and feature competitive interest rates, (currently 3.5%). They also offer a 3% down payment requirement, flexible underwriting guidelines, no-prepayment penalties, and down payment assistance.

To qualify for a SONYMA loan as a first-time homebuyer, you cannot have owned your primary residence in the last three years. You must meet the income limits, which vary per county throughout New York State. Additionally, there are purchase price limits, which makes it virtually impossible to find a property in Manhattan that qualifies.

One benefit of this type of loan is that the interest is not determined by your credit. However, you still need good credit. Instead, the interest rate is the same for everyone. Lastly, even though the program allows a 3% down payment, that doesn’t matter if the coop board requires the typical 20 to 30%.


Mortgages in New York City: VA loansMortgages in New York City: VA loan

The Department of Veterans Affairs (VA) provides its own loan guarantee program to eligible veterans and their spouses. The primary lenders make the loans, and the VA guarantees all or part of the loan in the unfortunate event that the borrower defaults on the loan.

With a VA loan, the VA sets the rules regarding eligibility. Generally, these types of loans may require little or no down payment. There is no purchase price limit when obtaining a VA loan. However, the VA will limit the amount of loan it will guarantee. If the loan represents an amount beyond what the VA loan will guarantee, the buyer may pay the difference in cash. Owner-occupied, one-to-four-family dwellings, including mobile homes, are all eligible for VA loans.

A Certificate of Reasonable Value (CRV) from an approved appraiser is required to receive a VA loan. The amount of the loan the VA will guarantee is based on the CRV. No prepayment penalty is permitted with VA loans. Some banks charge a funding fee to the borrower during the process.


CEMA mortgages Mortgages in New York City: mortgage application approved

A CEMA loan is not its own type of mortgage, but rather a way to avoid paying New York State mortgage taxes for those who are refinancing.  In some cases, buyers use it to purchase a new property. CEMA is short for Consolidation, Extension, and Modification Agreement. It is most commonly used by homeowners who want to refinance. Buyers will only need to pay the mortgage recording tax on the difference between the new loan and the old loan. This can result in significant savings. In rare cases, buyers use CEMA’s when purchasing a property, but the seller has to be on-board and own an existing mortgage. CEMA loans are only available on conventional, jumbo, and FHA mortgages for condos, houses, and townhouses. VA loans are not eligible, and they also don’t apply to co-ops as they are not considered real property.

Georges Benoliel Founder of NestApple - NestApple NYC cashback rebate

Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.