Real Estate Finance - Cause of the Real Estate Crash in the U.S.
The joy of your dream home in Florida can be very quickly and seriously spoiled by bad real estate financing. Therefore, you should deal with this topic intensively. The safest and easiest solution is of course a cash payment for your property in Florida with no financing involved at all.
In the case of a financed property purchase in Florida, financing by a German bank is preferable, as mortgage interest rates are 1.5 to 2% lower compared to U.S. institutions. However, most German banks refuse to lend on a foreign property. They must therefore have domestic lending options. If financing is provided by an American bank, foreigners are required to have an equity ratio of at least 30%, in some cases 40 to 50%. After a corresponding preliminary inquiry with self-disclosure, one receives a so-called bank pre-approval from a U.S. institute. This preliminary enquiry is carried out via our mortgage broker.
In contrast to other financing system, the American variant has a major advantage:
With very few exceptions, there is no prepayment penalty, i.e. you can repay the loan without penalty interest whenever your financial planning, liquidity, dollar exchange rate etc. make it seem reasonable.
A variety of different forms of financing are possible (below is a selection):
1. Adjustable Rate Mortgage (ARM)
There are 1 yr ARMs, 3 yr ARMs, 5 yr ARMs, 7 yr ARMs, 10 yr ARMs. The fixed-interest period is 1, 3, 5, 7 or 10 years. Thereafter, the interest rate can adjust according to market developments. In order to protect the borrower from a surprising rise in interest rates, the rise in interest rates in an ARM is limited by so-called "caps". With a 2/5 cap of a 3 yr ARM, the interest rate can be adjusted for the first time in 3 years, but only two percent per year and 5 percent over the entire term. Many home buyers went into insolvency after ARM's fixed-interest periods were too short due to rising interest rates.
2. Fixed Rate
Fixed-interest loans are available for 15 and 30 years. The borrower has a fixed guaranteed interest rate at all times and can clearly estimate his monthly payment. However, the borrower should be aware of a possible disadvantage: While in the case of an ARM with an early repayment the monthly rate decreases, this payment remains high when repaying a fixed-interest loan - instead, the remaining term decreases.
A balloon is mainly used to finance land and is usually also subject to fixed interest rates. The interest rates are slightly higher than for single family home financing. The terms are usually 2-5 years, in some cases even 10 years. There are models with complete repayment suspension ("interest only") or with only a small repayment portion - the payback is then designed for either 20, 25 or 30 years. The outstanding loan amount is due at maturity. Balloon financing usually has the character of interim financing. In the case of real estate loans, for example, they are either cancelled when the property is sold at a profit or, in the case of development, is replaced by a usually cheaper construction loan.
4. Home Equity Line of Credit (HELOC)
HELOC is a mortgage-backed credit line. The borrower can access a loan at any time without having to wait for approval. In boom times, this type of financing is an attractive option for investors to be able to react very quickly to good offers. Interest does not have to be paid on the unused credit line. An applied for and approved credit line can be used for up to 10 years.
This financing program is one of the most popular forms of financing. It is a credit model with negative amortization and includes an option for interest deferral and is one of the most customer-friendly programs of all, as it meets every scenario and every borrower with the most varied requirements. This model is particularly popular when the borrower's monthly income varies, when it is the first property in Florida, or when investors want to finance multiple properties and keep rates as low as possible. In this model, the customer decides when the loan is repaid and in what steps. At least that is the advertising statement of the banks. Ultimately, it was precisely these neg-am-loans and only-interest-loans that drove many homeowners into insolvency in times of falling property prices and rising interest rates - it is the ticking time bombs on the credit markets.
The financing banks enable the borrowers to pay a lower rate than would actually be due. If the regular interest rate is 6%, for example, a monthly minimum rate can be set at 1%. If the borrower pays only the monthly minimum installment, the original loan balance is increased accordingly by the amount of deferred interest and converted into an additional loan. The amount owed thus increases continuously to a maximum of 115 or 125% of the original loan balance. With falling real estate prices, the borrower is hopelessly over-indebted and the banks receive hardly any interest payments, let alone repayment of the principal, and thus get into difficulties themselves (subprime crisis). After the expiry of the fixed interest rate, the borrower is more heavily indebted than at the beginning of the term. Tailor-made and realistic financing is the guarantee for you to enjoy your property in the long term - talk to us.
Procedure of financing
Should you require financing from a single source, we can also arrange this for you. Our mortgage broker will first determine the estimated total cost of your transaction - GFE "Good Faith Estimate" - (purchase price, closing costs, capital procurement costs, etc.) and work out the optimal financing model for you. This initially estimated amount is precisely stated in the closing statement and your share of the total costs must be available on call on the escrow or trust account. A preliminary loan application is then made to a U.S. institution. If the creditworthiness of the prospective buyer is guaranteed, a preliminary commitment (pre-approval) is obtained. As soon as all the necessary documents are available, your application will be forwarded to the selected bank for final processing and approval (commitment). If no further documents are required, you will receive credit approval. For a short sale or foreclosure purchase, a loan commitment or a corresponding proof of equity capital is absolutely necessary in order to be able to react quickly.
As soon as the commitment letter is available, the remaining modalities are arranged, which have already been described in the item "Purchase Procedure". This may include surveying of the property, home inspection by an inspector who checks the property for possible damage, termite infestation, functionality of the equipment in the property etc.
In addition, we recommend taking out insurance (storm, fire, flooding, theft, etc.) - without appropriate insurance, no loan commitment. Lawyers or special offices of title insurance companies who insurance against legal defects are usually responsible for the legally binding transfer of the property. They function as notaries, so to speak. After clarification and execution of all preparatory work, all documents are forwarded to a title company office or to your personal legal representative for step-by-step processing. At the closing, the last act of the transaction, the title company or your lawyer pays the purchase price to the seller and enters you as the new owner in the public records. As already mentioned, your equity share must be paid in the form of a cashier's check or by a timely bank transfer (to be on the safe side, allow at least five days for this transfer). Please make sure that your equity and debt capital is available on the trust account in good time at the time of closing.
Always finance soundly and do not count your chickens before they hatch. If your property is to be rented, calculate with an initial occupancy rate of 30% for your vacation home in Florida. The higher the level of your property and the better the marketing, the more likely is a significantly higher utilization. In our portfolio we also manage vacation homes with occupancy rates of 70 or 80% in Cape Coral. The main reason for your investment should be the expected increase in value in the medium and long term if you buy at the currently extremely favorable prices. The rental serves primarily to cover ancillary and maintenance costs. A more detailed list of the expected costs can be found under Taxes/Maintenance.