As you know, one of the main components of the American dream is nothing but its own home. It’s no secret that the United States of America is on the list of the most profitable countries in the field of lending, especially mortgage lending. The low-interest rate on loans, a loyal attitude to borrowers, and a high standard of living in the country allow Americans to take loans without thinking about the multi-year burden of paying it off.
First of all, let’s understand the concepts of mortgages and loans secured by real estate
Wanting to buy a house, and not having the financial ability to do this, you go to the bank for a targeted loan – to purchase real estate. In this case, the house itself acts as a mortgage, as a pledge to the bank for a loan granted to you for its purchase, or for the purchase of other housing pledged to your property.
When registering such a transaction, the mortgage object will be officially entered into the register of rights to real estate, and information on the status of real estate “on bail” will become public. Until you fully repay the loan, the property will be documented by the pledgee – the bank, and formally by you. A mortgage loan is a type of loan in which funds are provided for the purchase of the real estate.
A bank transaction in providing you a consumer loan, for example, to purchase a car, as a guarantee of your real estate (of which you are the owner), will be considered a “loan secured by real estate”.
Despite the fairly affordable housing prices, many Americans, not wanting to lay out the sum of the cost of real estate in a single payment, take a mortgage for a period of 30 years. This makes it possible to monthly give the minimum part of their income to repay the loan, and not stay in the conditions of austerity.
Of course, in aggregate, the amount paid on interest for such a huge period of time will significantly exceed the interest on the loan for a period of 10 years. A mortgage for a period of 30 years at a 5 percent rate will cost the borrower twice the value of the property. This is because the client, paying a small amount on a loan monthly, pays almost one percent.
The borrower has the right to make a monthly payment several times larger than specified in the contract, thereby reducing the loan repayment period, if this does not contradict the terms of the contract.
A mortgage can be either with a fixed interest rate – Fixed-Rate Mortgage (FRM) or floating – Adjustable-Rate Mortgage (ARM).
What is the interest rate in the United States for real estate lending?
Americans are always faced with the choice of which option mortgage will be more profitable for them. The size of the floating interest rate is always lower than the fixed one (by 1-2%), but it is significantly affected by the conditions associated with the state of the US economy at the time the bank revises the rate. Having taken such a mortgage, the borrower kind of “plays roulette” with an interest rate, and is not able to distribute his expenses in the future.
Depending on the conditions of such a loan, the floating interest rate may not change in the first 3, 5, 7 years (3ARM, 5ARM, 7ARM) from the moment of mortgage registration, after which it can be raised to the limit values, for example, from the initial 3% to 7%.
At the end of the fixed period, the bank will annually review the rate until the borrower fully repays the loan, and in extremely rare cases, downwards. This type of mortgage is preferred by those who plan to repay the loan in a short period of time. Rates on such a loan on average range from 3.1% to 4.5%. To date, the rate on five-year mortgages (ARM) averages 2.85%.
The option of a fixed interest rate mortgage, due to the absence of risks, is increasingly attracting Americans. It is used by 75% of borrowers. Often, potential buyers of real estate wait for a moment of economic stability in the country, at which the rate of FRM is not too high and the entire loan period pays a lower interest rate.
90% of Americans wanting to buy real estate on credit choose a mortgage for a period of 30 years with a fixed interest rate. The average rate on such a loan is 3.72%.
For example, taking a mortgage in the amount of 200 thousand dollars for a period of 15 years, with an interest rate of 3.23%, the total repayment of the borrower will be 252 thousand dollars, for a period of 30 years with an interest rate of 4.5% – 365 thousand dollars. Over 90 percent of all real estate transactions in the United States accounted for by a mortgage.
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