Home Mortgage Rates in Illinois
Real estate prices in Illinois present an interesting challenge to analysts because the state has two very distinct markets: Chicago and the surrounding suburbs, and the rest of the state. This dichotomy affects the general level of prices as well as growth rates in the most popular destinations. Ultimately, the mortgage and foreclosure options and procedures apply to both areas and understanding them is important to navigating the Illinois real estate market.
General Real Estate Price Levels
While housing in Illinois tends to be on par with much on the country outside of the Chicago area, Chicago real estate prices are well above the national average. This is expected with any large U.S. city, and is what you will find in Chicago as well. As a whole, the recent average home price in Illinois is between $263,000 and $322,000; this is in line with the average level for the country, putting it well behind California, New York, and Florida (averages in these states tend to be upwards of $400,000). What is misleading in these figures is that home prices in the Chicago area are most consistent with California and New York – the large rural part of the state keeps these figures artificially low.
While some experts believe a recovery has begun, prices have fallen by as much as 30% in certain neighborhoods. This has been concentrated in the higher end of the market, but excludes the very top 5%. The most exclusive areas have held their value and remain with increased demand. When considering both ends of the spectrum, stabilization has likely begun, but a recovery remains elusive.
The Effect of Taxes
One phenomenon not helping to aid the recovery is the revenue levels of local governments, particularly in the city. As real estate prices have fallen, and foreclosures and delinquencies have mounted, tax revenues have plunged. This has left many municipalities struggling to maintain basic service levels and facing economic hardship.
Cook County, home of downtown Chicago, has been deeply impacted. Economic recession has increased the demand for public services at the same time as revenues have fallen. To offset this disparity to some extent, sales taxes have been raised several times – finally cresting the 10% level. While the city has seen increased income as a result, there has been a definite exodus away from downtown. Consumers faced with the need to tighten their own budgets are more willing to travel outside the city (and county) in search of lower sales tax. In response, businesses have relocated outside of the city as well. The combined impact has put an additional strain of the already struggling local government.
The byproduct of the sales tax maneuvering is that an increased number of people are choosing to live outside of the city. This is adding to the negative price pressure on city real estate. Therefore, while prices have stabilized and remain elevated, the decline has been sizable and has had a significant impact.
Available Mortgage Types
Fixed Rate Loans – Perhaps the most standard of all mortgage loans, the 30-year fixed rate mortgage is still the preference of many Illinois borrowers. These loans are recourse loans (see the discussion of foreclosure procedures below), and carry a fixed interest rate for the life of the loan. Occasionally available with a duration of 15 years at a decreased rate, typically fixed rate mortgages are 30 years long.
Adjustable Rate Mortgages (ARMs) – With an adjustable rate mortgage, there are two relevant time measures: how soon the rate may be adjusted for the first time and how often thereafter. Almost all ARM last for 30 years after they are initiated. This type of loan tends to carry an initial interest rate that is lower than the fixed option because the lender knows that if rates in the general market increase, the ARM can be reset higher, thus protecting the lender’s position. While not appropriate for everyone, this was an attractive option for borrowers who believed they would not remain in their home for an extended period of time. If you move before rates reset beyond the break-even level, the savings on the lower rate while you remain in the home is worthwhile. If you intend to pursue this approach, carefully assessing where the break-even point falls and making realistic projections about your future circumstances is a critical step in the process.
Interest-Only Loans – While far less available than they once were, Illinois permits this type of mortgage structure. Under an interest-only loan, the borrower is only paying toward the interest for the initial period of the loan, rather than paying down any amount of principal. Originally conceived to benefit homeowners at tax time, this structure was often abused. As all interest towards one’s primary residence is tax deductable, and interest-only loan maximizes this amount early in the payment process. At some point, however, the borrower must begin repaying principal. This can lead to a significant increase in the amount of the monthly payment. When combined with an adjustable rate (as was the case for many of these loans), the borrower often found him or herself in a position where the monthly payment on their loan spiked to a prohibitively high level. In the best scenario, the monthly payments are held consistent under this structure and the mortgage is granted at a fixed rate – over time, when enough interest has been paid, the borrower’s payments begin to be applied to principle, but this is seamless and unfelt by the borrower.
Flexible Payment Mortgages – All but eliminated today, a flexible payment mortgage allows the borrower to decide if he or she will make a principal and interest payment, make an interest payment only, or even skip a payment. This level of flexibility was granted during a time when many lenders considered prices on a never-ending upward trajectory. Since property could only increase in value, if foreclosure was necessary, the lender was protected. While legacy versions of this structure still exist, and new loans can occasionally be located, this option has essentially disappeared.
Home Equity Loans – Illinois law permits property owners to take out revolving lines of credit against property they own. The most common use of these loans in Illinois, aside from allowing borrowers to become over extended, is to help purchases of high cost property to avoid the increased interest rates associated with jumbo loans. In many, if not most, cases, the blended rate available from combining a traditional home mortgage with a higher rate home equity loan, is lower than the rate on a jumbo. This is particularly true for borrowers who are just above the conforming loan limits. This level, which had been set at $417,000 for many years, was recently raised to $730,000. Loans above the old limit, however, still attract the higher rates.
Illinois Foreclosure Rules
Under Illinois law, both lenders and borrowers have certain rights in the foreclosure process. Every state has slightly different procedures, but each state strives to balance the rights of the lender and the borrower and to promote the general good.
What follows are the highlights of the Illinois system:
- Both judicial and non-judicial foreclosures are permitted, but as Illinois is a lien state (as opposed to a deed in trust) power of sale non-judicial foreclosures are banned. Essentially, in Illinois, a mortgage creates a lien by the mortgage holder against the property, rather than full property rights. The mortgage holder may therefore, proceed against the property both in and out of court, but may not simply sell the property out from under the delinquent home owner because it does not have sufficient property rights.
- The borrower has 90 days to reinstate the loan after being served with a judicial foreclosure and has 90 days to redeem the loan after a judgment of foreclosure is entered. Under the first of these right, the borrower may end the proceedings by bring the loan current. Under the second, the borrower may retain ownership of the home by paying the auction price after a foreclosed home has been sold. These rights have different subtleties, but combine to give a homeowner several protections, even after foreclosure procedures have commenced.
- Illinois is a recourse state, meaning that a lender make seek what is called a deficiency judgment. This means that if a borrower defaults on a mortgage, the lender forecloses and sells the house, and the sales price is insufficient to cover the principal amount of the loan, the lender may ask the court for a ruling against that borrower obligating him or her to pay the remaining balance. These judgments have limited effectiveness because usually a foreclosed homeowner has little asset with which to make repayment, but the right does give lenders and added level of protection.
As is the case in most states, legislators are regularly looking for ways to both protect their citizens and to ensure orderly lending practices. The recent financial turmoil has created new pressures to update laws from both perspectives, so homeowners are encouraged to keep abreast of changes that may potentially have a dramatic impact on their rights and responsibilities, particularly in case something goes astray.