If you’re a luxury buyer looking to purchase a Chicago home, your strategy for doing so might be obvious—pay cash outright and avoid the “hassle” of a loan.
Buyers who can afford to purchase a home in cash are often turned off by the idea of a mortgage—the burden of an interest rate, paying for private mortgage insurance (PMI) and spending much of your cash on a down payment that you might as well pay cash for the whole thing.
But the answer to many of these objections might lie in a jumbo loan. A jumbo loan (for amounts over $417,000 in Chicago) is more enticing than ever to the wealthy buyer, with lower rates and favorable terms that don’t mean spending your savings in one fell swoop.
I’d like to dispel 3 important myths that Chicago luxury real estate buyers might have heard about obtaining a jumbo loan for their home purchase:
You’ll need a large down payment. Traditionally, banks want at least 20% of the purchase price as a down payment. But luxury buyers who are borrowing a jumbo loan could have a bit of leeway here. For one, a down payment on a jumbo loan is still a good chunk of money. For a $1.5 million home, a 15% down payment is still a significant amount of cash that “invests” the buyer into the purchase and makes them unlikely to walk away.
And while some might see a low down payment resulting in a higher loan-to-value ratio, many buyers see this as a money management strategy that affords them extra liquidity in their funds to keep in the stock market or other investments.
Strict mortgage lending standards also keep high loan-to-value loans from reaching the point of risk that they did several years ago. Borrowers still must have a strong credit score, reserve funds and a debt-to-income ratio under 35% to qualify.
You’ll pay a higher interest rate. Right now, rates are historically low to begin with. And many lenders are offering their jumbo loans with a lower rate to entice borrowing instead of paying for cash. So even if you put down less than 20% of the purchase price, you’ll still be well-positioned for a low interest rate.
You’ll need private mortgage insurance. A jumbo loan is not a conventional loan, which means it’s not a government-backed loan like many mortgages. That makes them privately held, so banks/lenders can decide individually if they want to charge borrowers private mortgage insurance—and most of them do not.
I would be happy to put you in contact with a lending expert who can give you more information on purchasing a Chicago home with a mortgage versus paying cash. With today’s loan market, it might be worth considering for a luxury real estate purchase especially. To learn more about jumbo loans or to see what’s on the Chicago real estate market, contact me at (312) 498-5080 or email me at [email protected]amtown.com.