I've spent the past week explaining why it's so important to do serious comparison shopping and saving up before you apply for a loan. On Monday we investigated how you could save up to 35% over the life of your loan by working with discount points and down payments. On Wednesday I used a salad dressing analogy to explain APR and how it affects your bottom line. For today I've gone back to my nerdy coding roots and have made a pretty hefty calculator so you can play with the numbers yourself.
So I was at McDonald’s today. (Bring it on, indignant foodie brigade! You’ll pry my french fries out of my cold, greasy, dead hands.) I was confronted at the palais de graisses saturées with the “Under 400 calorie” menu that they’ve rolled out to go with the 2012 London Olympics. A copy is below in case you’ve not sullied yourself with such things lately.
The McDonald’s “Under 400 Calorie” menu. This will make sense in a moment. Click to super-size me.
It was the salads that caught my eye. Maybe not for dinner, but for the purposes of explaining this article. Because salads – or rather, salad dressings – make a wonderful analogy for explaining APR and interest rates.
Salads are Kind of Complicated.
So, you get your basic side salad and it’s 20 calories. You nibble, you gain very little weight, you feel full, end of story. But a salad of just iceberg lettuce, cucumber slices and a couple of cherry tomatoes won’t get you featured in Time Out Magazine. People start getting creative. The good folks over at “Cooking Light” explain in a nifty slideshow how a restaurant salad can quickly rack up over 1500 calories, not to mention the fat & sodium involved. The more stuff you put on your salad, the more time you’ll have to spend at the gym later to work it off. But it’s so easy when you’re ordering the salad to say, “OK, I can have these croutons now, it’s no big deal.”
We’ve been doing this for so long that it’s become a cliché – “a minute on the lips, a lifetime on the hips.”
If you’re working with a weight loss deadline – say, swimsuit season or trying to squeeze into a fancy halloween costume – suddenly the amount of exercise you’ll have to do to neutralize the ranch dressing gets compressed into a far shorter time period. 500 extra calories is a lot harder to work off in a week than slowly over a few months. You start giving some thought to your order. Hold off on the croutons, swap out the buttermilk ranch dressing for a low-cal balsamic vinaigrette.
From Our Lettuce to Your Cabbage.
So when you go to buy money from a bank or a mortgage broker, you’re faced with a situation very similar to ordering a salad. Every lender will offer you a different base interest rate – that’s like every restaurant offering you a different combination of vegetables on a bare, undressed salad. Some banks will be small local ones, others big national ones, just like some salads are organic & locally grown while others are covered in pesticide & imported from Mexico. It’s your choice as to which way you want to go.
Beyond the basic lettuce, though, there’s all of the extras consider. When dealing with salad, you’re talking about dressings, croutons, and maybe those tasty little sesame sticks. In the case of the other green stuff – borrowed money – it’s all of the lender’s assorted fees & commissions. And in the lending world, all of that stuff found in the difference between the interest rate and the APR.
Lenders charge to give you a loan. They are selling money. They have to turn a profit. They may say it’s a “no-fee” loan up front to get you talking to them, but the fees may actually be wrapped up in your monthly payments instead. The government has recently started requiring restaurants to disclose the calorie content of their dishes. Similarly, the Truth in Lending act requires lenders to disclose any hidden fees that you will be required to pay, either at closing or folded in.
I’ll give you an example.
This image brought to you by lots of pounding on Excel very late at night.
That chart above explains it nicely. But there’s a problem. See, the APR they disclose to you is based on the thought that you’ll be in the place for the entire life of the loan. Most people are not planning on staying in their home for 30 years even though they get a 30 year mortgage. So while it’s all well and good that the banks are disclosing their APRs to us, it doesn’t really matter if you’re planning on taking off much earlier.
Shorter-Term Loans are Kinda Complicated, Too.
Remember when I started talking about dieting on a deadline up above? That’s coming back now. Just like that 1500 calorie salad is a lot more of a challenge if you’re trying to drop 20 pounds in a short time, the actual APR that you would be taking on will be much higher than the quoted amount of you’re planning on paying off the loan in, say, 7 years.
You’re still borrowing $50k plus $2k in finance charges. You’re still going to have to work off those extra calories – the finance fee salad dressing, if you will – but you’ll have less time to do it. Remember, you still have a loan for $50,000 at 3% interest. But with the finance fees included you’re suddenly paying off the balance plus the fees in a shorter amount of time. $2000 spread out over 84 months is a lot tougher than $2000 over 360 months.
Let’s take a look at what the real APR would be for someone who leaves after 7 years. I’ve done another handy chart below.
If you’re planning on staying for a short time, the quoted APR that the bank has to give you will not mean a whole lot. This chart explains why.
In Monday’s article, the savings from paying discount points and a higher down payment at closing increased with a longer stay in the property, from 9% after 5 years to 35% over the life of the loan. This is also true for APR. The longer you stay, more fully distributed those fees will become, and the closer your real-life APR will get to the numbers quoted by your lender. It will take you less time to get to your break-even point.
Wrapping it Up to Go.
It’s best if you can find a mortgage broker with no difference between the actual interest rate and the APR. However, if the best interest rates you get are quoted by lenders that are going to charge you fees, make sure you calculate your own actual APR or talk with your Realtor, accountant or a neutral and mathematically gifted individual to figure out if the cost in fees will be more than the difference in quoted rates.
Let’s look at another handy chart to help explain what I mean.
Don’t get all excited about a low interest rate if you’re going to be paying through the nose in financing fees. Give some thought to how long you’re planning on keeping the property before you start shopping for a loan.
So next time you see APR don’t be confused and don’t mentally check out of the conversation. Lenders are going to rely on you being both a) confused by the term and b) too ashamed to ask what it means. For a high-cost lender to voluntarily explain APR to you in a clear manner would be shooting themselves in the foot. Just remember when the term comes up that it’s like figuring out what to get on your salad. High APR is like high-fat dressing. The best thing for your financial health is to stay away from the extras and find the most basic, low-fat loan you possibly can.
(Aren’t you proud of me? I made it all the way through that without a single “bacon bits” pun!)
Stand back, all my darling practical piggies, because I’m going to do math for you again and it’s going to be fabulous.
Today’s delicious math is performed with the end goal of explaining why you really do need to shop around for your mortgage, and why you need to do so before you start shopping for a home with a Realtor.
See, if you’re buying a home and I’m representing you, my job is to negotiate the lowest possible price. We Realtors do pretty well at the whole negotiation thing. According to MRED’s MLS, the final sale prices of homes in Chicago over the past year have been about 10% less than their final list prices. 10% is nice. I got 25% off for one of my buyers this year and felt pretty darned pleased with myself for doing so, but it was a special & extreme circumstance.
But the true cost of a home isn’t just the purchase price. What about the closing costs and interest payments that you’ll rack up over the life of your loan? Unless you’re paying cash only, you’re going to be paying out quite a bit more for the privilege of borrowing someone else’s money. I do everything I can to get you the lowest purchase price, but how much you actually pay? That’s up to you.
By planning ahead, saving a good down payment and working the details of your mortgage you could save 9% on the total money spent after just 5 years in your home. By year 10 that savings is up to 21%. If you stayed in the home for the full life of the loan you would save 35%. That’s more than you’d save in any sort of negotiations over the actual purchase price, and definitely more than the piddly 2.5 to 3% you’d purportedly save on just the purchase price by going without an agent at all. (more…)
Fires happen far too often in Chicago apartments, but prevention can be very expensive. Clockwise from top right: June 2011 Hyde Park (Tribune), January 2012 Lakeview (CBS Chicago), October 2011 Edgewater (Tribune), Lakeview April 2012 (CBS Chicago).
Safe homes for a small fee. Tinley Park is joining what must now be a majority of Chicagoland suburbs that require some sort of city-sponsored training and licensing from landlords. Everybody wants a cut under the pretense of safety. (Tribune)
.. or a large fee. Some Condominium high rises are having problems coming up with the necessary funds to comply with Chicago’s high rise life safety ordinance. Enacted after a fire at the downtown County administration building killed several in 2003, it requires tall apartment & condo buildings to install either communications systems and either sprinklers or fire-blocking doorways. Compliance could bankrupt some condo associations but the steep fines could too. (Tribune)
… or no fees at all? Meanwhile a recent Massachusetts lawsuit has made it illegal in that state for an apartment community to charge anything beyond first & last month’s rent, a security deposit of no more than one month’s rent, plus a lock change fee. Background check fees, move-in fees, administrative fees and pet deposits are not allowed. This has, of course, led to an enormous volume of class action suits against Massachusetts landlords. Could Illinois or Chicago go the same way? (GTLaw.com)
But then there’s the fees that nobody pays, but probably should. Usually homeowners are required by either their lender or their condo association to carry insurance for their home. Renters on the other hand? Not so much. According to a recent study by the Insurance Information Institute, renters outnumber homeowners in the country’s largest cities but only 31% of renters have renters’ insurance. (CNBC.com)
HUD comes calling at the CHA. In past Weekend Links articles I’ve been following the story of the high volume of empty apartments in housing projects owned & managed by the Chicago Housing Authority. Apparently I’m not the only one – HUD’s now paying attention too. (ChicagoNow)
Casa de Shenandoah, aka Graceland West. Home of Wayne Newton. That’s a whole lot of “Danke SchÃ¶n” right there. (LasVegasGinger.blogspot.com)
Eviction of the week. Wayne Newton. (No kidding.) Mr. Newton is on the splits from his business partner, with whom he had been seeking to turn his Nevada mansion into a Newton-based theme park. (I really wish I was kidding.) So he sold his estate to the partner’s company, CSD LLC, which has since spent about $50 million on the incomplete project. It can move no further due to conflicts between Newton and the company as to how to best continue. CSD is suing to evict Newton. (This is serious business. VERY SERIOUS.) (KLAS-TV)
House music like no other winds up our week. Here’s an oldie but goodie from 2005 that satisfies my love of totally wacko architecture like no other. It’s a house that also serves as a resonation box for the strings wired through it like an enormous harp. Symphonic House/Wege House in Michigan was designed by David Hanwalt with sonic installation by “America’s Got Talent” contestant William Close. The homepage is big on media, low on text, so here’s a description of it from the Trib to go with.
In every area we considered, the rents this year are higher than the rents from 2011 in Chicago.
It’s the first Friday of August, so that means it’s again time for a snapshot of the Chicago rental market in tasty bacon strip format. Comparing rent rates and market times between June 2012 against June 2011, we’re seeing increases again in all three of the zones tracked by StrawStickStone.
As you may recall, last month saw a shift in how Rent Bacon was calculated. Both rent rates and market times are considered in a 3:1 weighted average. This month we hit our six-month mark, and the news continues to be grim for renters and rosy for landlords.
Analysis, Mr. Spock?
Inventory was actually down in June compared with May, but only by a small amount. Both Downtown (Zone 1) and the Far North/Northwest regions saw lowered activity on the 2 bed/2 bath sector that we use as our benchmark, although the Zone 2 trendy areas saw an increase that more than offsets the losses seen in the other two zones.
Market times, however, improved in Zones 1 & 3, albeit only slightly, and saw almost no change at all in Zone 2. What this indicates to me is that by June of 2011 we were already in a rapidly accelerating market. The pace can’t get any faster. The 23-29 day market times seen both years in Zones 1 & 2 mean that the rentals are actually going under contract after one weekend on the market, given how long it takes for a rental to go from off-market to leased. With market times at their absolute limit, the only margin that can move is rent rates.
Zone 1 has seen the average price of a 2 bed/2 bath go fro;m the $2200-2300 range in 2011 to the $2350-2600 range consistently in every month this year. The average increase seen across the six months that I’ve been running Rent Bacon is 8.6%. Guys, 8.6% is just over one month’s rent over the course of a year. Zones 2 & 3 aren’t quite so awful, seeing an average increase of 4.5 to 5% across the board compared to last year, but considering that the populations in these areas are far less likely to see pay increases or even employment at all, it’s still an awful burden on the average renter. Zone 2’s average rent for a 2 bed/2 bath just passed $2000 for the first time. Zone 3’s averages are the highest they’ve been all year.
Average Market Time
Stats reflect pricing and activity for 2 bedroom, 2 bathroom apartments listed in ConnectMLS as with rented dates during the month of April. Analysis of specific areas is available upon request.
What is Rent Bacon?
Rent Bacon is a quick visual summary of whatâ€™s happening in the rental market this month compared with this time last year. It breaks the city down into three zones. For each zone, it takes the change in average rent rates and the change in average market times as percentages, and then averages the two percentages together on a 3 to 1 weighted basis.
Zone 1 covers central Chicago from South Loop through Lincoln Park. (Actual coordinates: 2000 South to 2000 North, from Western Ave to the Lake).
Zone 2 covers the near North side of Chicago, including Lakeview, Bucktown, Uptown, Lincoln Square, Roscoe Village and NorthCenter. (Actual coordinates: 2000 North to 5200 North, from Western Ave to the Lake.)
Zone 3 covers the Far North and Near South side of Chicago, including Edgewater, Andersonville, Rogers Park, West Ridge, Chinatown, Bridgeport and Douglas. (Actual coordinates: 5200-7600 North plus 2000-4500 South, from Western Ave to the Lake.)
There are many varied types of apartments in Chicago, each appealing to a different audience. In this new “Field Guide” series (updating on a sporadic basis) I hope to cover some of the local species of apartments. Learn to spot, capture, tag and, if necessary, release them back into the wild.
Today we’ll be starting with the Garden Apartment and its variants, the English Garden, the Fake English, the In-Law apartment and the Duplex down.
The Chicago garden apartment (Apartmentus fundamenti) can be found throughout the city although they rarely make an appearance in the downtown area. Any apartment with the majority of its square footage at or below ground level is referred to by Chicagoans as a “garden unit.” It is a regional term which can mean anything from sidewalk level to deep basements. Nearly every Chicago apartment building under 7 stories will have at least one garden unit.
Comparative Value and Appeal
Formerly used by building owners for themselves while renting out the more expensive upstairs units, garden units have become more available to the tenant pool over time as apartment buildings get bought up by outside investors and others got converted to condominiums. While gardens have long been maligned as dangerous, with higher potential for break-ins, floods and pest control problems, they have their fans. (more…)
StrawStickStone is a blog for the Chicago real estate market, written by a former Chicago Realtor with a experience in residential sales and apartment property management, but not in law or accounting. Content and advice published here do not always apply in other areas of the world.