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In this comparator, you can consult information on how the mortgage market works in the United States of America if you are planning to buy a house to live in or for your vacations.
In addition, you can learn about mortgage loans offers provided by the banks so that you can obtain financing to buy a house, to build it, to make improvements, to refinance your current mortgage loan or even to obtain liquidity with the home equity and use it for whatever you need.
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Here are some points of interest for you to know what mortgages are and how to compare them to choose the one that best suits your situation.
What are mortgage loans
A mortgage loan is a contract where the lender commits to lend an amount of money to the borrower guaranteeing the loan with the property of the house, which will be the mortgaged good.
The debtor undertakes to repay the money plus the agreed interest over the signed period in the form of installments, usually monthly. In the event that the borrower is unable to repay the capital loaned, the financial institution may proceed to foreclose the mortgage, which means that the property of the house remains in the hands of the bank and the debt is paid off.
The housing guarantee allows mortgage loans to have much more advantageous conditions than personal loans, especially in terms of interest rates and term.
The usual purpose of these products is the purchase of a home which, due to its high price, few people can afford to pay out of their savings. They can also be used to finance the construction of a house, to carry out reforms or to refinancing your current mortgage, obtaining better conditions.
Obtaining cash for other projects is also one of their functions, although in this case we usually refer to them as Home Equity Loans, which we will see below.
Within mortgages, we can distinguish them according to the interest rate they apply, which can be fixed or variable.
These are loans in which the rate to be applied throughout the life of the mortgage is agreed from the outset. In this case, monthly payments will always be the same and you will be able to know the total amount of interest you will pay before signing the contract.
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They have the advantage of stability and peace of mind that you will always pay the same, but in the event that the official interest rates of the FED go down a lot, you will be paying more interest than those who have contracted a variable mortgage.
Unlike fixed-rate mortgages, in adjustable-rate mortgages (ARMs) the interest rate applied is adjusted during the repayment period. For this purpose, a reference index is used, which in the USA is usually the SOFR rate, to which a margin or differential is applied.
Every 6 or 12 months, the interest rate is recalculated and will go up or down depending on the behavior of the index. In this way, the monthly installment changes throughout the amortization period, benefiting us from the decreases and harming us from the increases.
The advantage of this modality is that if the official interest rates go down, we will pay less than with fixed-rate mortgages.
What are home equity loans and lines of credit?
Within this category we can find both loans and lines of credit (HELOC - Home Equity Line Of Credit) and its functionality is to obtain money to use it for any purpose we need.
It is similar to a personal loan, but we use our home as collateral, thus obtaining lower interest rates and larger amounts and terms.
They can be requested even when we have not yet finished paying the current mortgage, being able to obtain a maximum of the value already repaid.
What are Jumbo Loans
Jumbo Loans are a type of mortgage that offers large amounts of money. The limit at which a Jumbo mortgage is usually referred to is set by the semi-governmental companies Fannie Mae and Freddie Mac and is the maximum amount of a mortgage they are willing to take out from a lender.
To contract this type of mortgage the requirements are more demanding than with conventional mortgages, having to have a very high credit score and a high income.
How to compare several mortgages
In order to compare different mortgage loans, it is necessary to check different variables, as well as to evaluate as many options as possible to find the one that best suits your needs and that at the same time involves the least possible amount of expenses, fees and interests.
These are some of the most important factors to look for when comparing mortgages:
- Fixed-rate or adjustable-rate. The type of interest rate is important, if you want stability, a fixed-rate mortgage is best. If you want to benefit if the FED interest rates go down, it is better to go for an adjustable-rate one.
- Interest Percentage Rate. Also known as Nominal Interest Rate, it is the percentage that will be applied to calculate the interest you will pay each month in your installment, the lower the better.
- Fees. Although we will evaluate this section in more detail below, the ideal is to pay as few fees as possible.
- APR. The Annual Percentage Rate is a data that allows us to compare different mortgages, since it includes all the direct expenses that are applied during the contracting and repayment of a mortgage loan.
- Bindings. It is common for banks to require their customers to make certain commitments with them in order to take out a mortgage, such as opening a checking account, applying for credit cards, taking out life and home insurance or acquiring deposits or other investment products.
It is advisable to use the simulators offered on their websites, such as the one offered by Wells Fargo or TD bank, to find out the specific conditions for your case.
What fees can mortgages have
These are the most common expenses you may encounter when taking out a mortgage:
- Application Fee. This is applied as a cost for processing your application and making an initial evaluation to see if you are eligible for the loan.
- Origination Fee. This is charged when the mortgage is contracted and includes the procedures for preparing all the documentation, the definitive evaluation of the application and other administrative expenses.
- Appraisal Fee. This is the cost of having the official purchase price evaluated by a specialist or appraiser, who will determine the maximum amount that the bank can lend you. This cost is usually between $300 and $500.
- Prepayment Fee. If you decide to repay part or all of the outstanding principal in advance, the bank may charge you a percentage of the amount repaid in an extraordinary manner.
In addition to the fees that the bank may charge you for taking out a mortgage, you will also have to pay other expenses like local fees and taxes.
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