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Mortgages: FRM and ARM
Mortgages (home loans in America are available from a large number of sources including savings and loan associations (who provide over half of all mortgages), commercial banks, mortgage bankers and brokers, insurance companies, credit unions, builders and developers, government agencies and home sellers. Mortgages comprise almost 80 per cent of savings and loan business, compared with around 30 per cent of commercial banks’ business. Savings and loans associations are, by law, required to make mortgages at least 60 per cent of their business.
Deposits & Maximum Loans: Most American lenders won’t lend more than 70 or 80 per cent of the market value of a property to non-residents (residents can borrow up to 95 per cent), meaning that if you want to buy a $100,000 home, you must usually find a deposit (down payment) of at least $20,000. If you pay less than a 20 per cent deposit, most mortgage lenders insist that you have a mortgage life insurance or private mortgage insurance (PMI) policy. This pays off the outstanding balance on the mortgage should you die before it’s paid off. PMI normally costs between $30 and $60 per month but can usually be cancelled once a certain amount of a mortgage has been repaid. Overseas buyers must normally make a deposit equivalent to between three and six months’ mortgage payments.
Lending Criteria: Lenders will evaluate a property to confirm its value and check your credit rating (see page 93), employment history, income, assets, residence and liabilities. You should check your own credit rating before applying for a mortgage to ensure that it doesn’t contain anything that could adversely affect your application. Your credit rating must usually be perfect to qualify for a home loan.
Income Requirements: The maximum amount a bank will lend you depends on your income. Most lenders limit a mortgage to no more than three times your annual salary or limit monthly repayments to a maximum of around 30 per cent of your gross monthly income. When calculating how large a mortgage you can afford, take into account all closing costs, which average 3 to 6 per cent of the sale price of a property and depend on its location, cost and other factors. When the broker or lender pays all of your closing costs is commonly referred to as a "no closing cost"' loan. These closing costs would include appraisal, lender's fees, credit report fees, title & escrow fees, and other expenses which are non-recurring over the life of the loan. .Non-income status mortgages of 65 to 70 per cent with no proof of income or tax returns are also available, although borrowers usually require a significant amount of money in savings or investments. Note that it’s often difficult or more expensive to raise finance for an American property abroad. It takes between 30 and 90 days to arrange an American mortgage, depending on its complexity.
Points: The sort of mortgage deal you’re able to negotiate will depend on a number of factors, not least the state of the housing and money markets. Lenders usually charge a fee for granting a mortgage, expressed as a number of points, each of which is equal to 1 per cent of the loan amount. In a competitive market you may be offered a mortgage with no points. However, when there’s a glut of buyers looking for loans, you will be charged a fee of one to four points, which can increase the cost of your mortgage considerably.
Shopping Around: To attract new customers, lenders may offer inducements such as below-market interest rates (or interest-free for the first year), exceptional long-term loans, discounts, rebates and give-away (gifts), most of which don’t provide real savings or long-term advantages. Transferable (assumable) mortgages, which can be sold with a property, are often an attractive proposition, and it’s possible to assume an existing fixed-rate mortgage, which is a good deal if the interest rate is lower than the current market rate.
Note that if interest rates drop, you may be able to save money by refinancing a loan, resulting in considerable savings over the term of the loan. Refinancing is generally worthwhile only when the interest rate on your mortgage is at least 2 per cent higher than the prevailing market rate. Bear in mind that it can take months to refinance a home loan and you must take into account all associated fees and other payments. Refinancing costs usually range from 4.5 to 5 per cent of your mortgage value, so it may not be worthwhile if you have only a small mortgage.
Interest rates fell dramatically in America during 2001, when the official rate was reduced 11 times in 12 months. Rates vary slightly by region, but on a typical 30-year fixed-rate mortgage the average rate at the end of 2001 was 6.75 per cent and the average on a 1 5-year fixed-rate mortgage was 6.4 per cent. Shop around for the best deal you can find (including closing services and all costs). For a fee of around $30, Money magazine’s ‘Mortgage Match’ service (1-800-243-8474) provides a weekly-updated list of lenders with loan rates, points, fees, indexes, margins, caps, commitment periods, rate locks and other information to enable you to find the best mortgage deal. Using the services of a mortgage search company or independent broker is another way to find a good mortgage deal, or you can search the Internet (e.g. www.iown.com or www.eloan.com)
Mortgage Period: The traditional American mortgage period is 30-years, although lenders also offer 10 or 15-year fixed-rate mortgages, requiring either a higher deposit or higher monthly repayments than a 30-year mortgage (or sometimes both). If you can afford the repayments, a 10 or 15-year mortgage can save you a considerable amount in interest compared with a 30-year mortgage. For example, monthly repayments on a 15-year, $100,000 mortgage at 10 per cent would be $1,075, compared with $878 over a 30-year period, a difference of $197 a month or $35,460 over the 15-year term. However, the 15-year mortgage would result in interest savings of $122,580 over the period of the loan at a flat 10 per cent. In fact, a 15-year mortgage is usually offered at a slightly lower interest rate (e.g. a 0.25 to 0.75 per cent reduction) than a 30-year mortgage, meaning you will make even greater savings. Note, however, that with a 15-year mortgage (unlike a 30-year mortgage), you may not be able to reduce your monthly repayments during hard times.
The most common types of mortgage in America are fixed-rate mortgages and adjustable-rate mortgages (ARMs).
Fixed-Rate Mortgage: This is the traditional American mortgage, where the interest rate is fixed, regardless of whether interest rates go up or down, and can be repaid over 10, 15, 20 or 30 years (see Mortgage Period above). It’s paid off in equal monthly payments comprising principal and interest (called amortization), until the debt is paid in full. A fixed-rate mortgage offers stability and long-term tax advantages, although interest rates are initially higher than with an adjustable-rate mortgage. A fixed-rate mortgage isn’t assumable, i.e. a buyer cannot take over the seller’s original below market-rate mortgage. If your income is fixed or rises slowly, you’re generally better off with a fixed-rate mortgage, although some people don’t qualify because their income is too low. With a low interest rate, experts recommend taking a fixed-rate mortgage. Find More information about mortgages >>
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