United States Mortgage Market

Introduction

The US housing market is cooling off.  Despite recovering quite well from the burst of the housing bubble, housing demand and construction are both leveling off quite sharply with the secondary home prices slowing as well.  On the contrary, primary prices are increasing quite strongly. In October 2014, the median sales price of new homes sold in the U.S. rose by 15.4% from the previous year. Demand for new homes is decreasing with new house sales increasing by just 1.8% in October 2014 from the previous year. First-time buyers are also dropping out of the market. The share of first-time home owners dropped from 38% to 33% in 2014, the lowest percentage since 1987.

Property Rights in the United States

There are a few restrictions on foreign ownership of real estate in the United States but they are insignificant for buy-to-let investment purposes.  There are state regulations for foreign ownership, such as in Oklahoma, a foreigner cannot purchase land although they can own a condominium.  There are also state procedures for purchasing a home, as well as different procedures per county and city, so it would be prudent to check with corresponding legislation before starting your search. 

The round trip transaction costs for a sale-purchase in the US consist of all the costs of buying and then re-selling a property.  These include registration, notary, agent, and legal fees, as well as taxes.  In the United States, there are also several costs that are usually paid for at the closing of a sale-purchase agreement, hence they are called closing costs. They may include appraisal fees, home insurance, mortgage and bank-related fees, as well as inspection fees and property taxes.  Real estate agent fee’s are usually around 6%, but are negotiable and normally incurred by the seller.  Other taxes and fees differ based on location. 

Financing Options

Standard Mortgages

Fixed-rate Mortgage

The interest rate remains constant over the entire term, usually 15, 20, or 30 years.  A disadvantage of a fixed-rate mortgage is that if interest rates fall, you could be stuck paying a higher rate. 

Adjustable-rate or Variable-rate Mortgage

The adjustable-rate mortgage (ARM) usually offers a lower initial rate of interest than fixed-rate loans.  After an initial period of payment, interest rates will fluctuate over the life of the mortgage.  When interest rates rise, so do your loan payments.

Balloon Mortgage

Usually consists of a fixed-rate loan with relatively low payments for a fixed period.  After an initial period, the entire balance of the loan is due immediately.  *Quite risky for some borrowers

Interest only

The borrower pays only the monthly interest rate payments for a fixed term.  After an initial period, the balance of the loan is due, which could require much higher payments, a lump sum, or the refinancing of your property. 

Federally Subsidized Loans

FHA (Federal Housing Administration) Loan

Allows buyers who may not qualify for a home loan to obtain one low down payment, however, the size of your loan may be limited. 

VA Loan

Guaranteed loans for eligible veterans, active duty personnel, and surviving spouses.  These loans offer competitive rates, low or no down payments.  However, the size of your loan may be limited.

Reverse Mortgage

Reverse mortgages allow seniors to convert equity in their homes to cash.  You are not required to pay back the loan or interest as long as you live in the house.  These types of loans are subject to aggressive lending practices and false advertising.  It is important to check and make sure these loans are Federally issued. 

There are also other subsidized loans in addition to those listed above (i.e. Energy Efficient Mortgage).

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