USA vs Australia home loan

[Aussie]

Hi,

I am planning on moving back to the US next year and am considering buying a home.  I have become very fluent in Aussie financial language, but am a little lost in terms of Us mortgage terms.

In Australia, I currently have a no-fee variable home loan at 5.45APR (OK for Australia, but much higher than US) on a small investment property valued at ~$220,000 AUD and netting $1150/month rent.  I have about $10,000 left on the home loan and another 25 years to pay it off.  I do have some cash in USD valued > $10,000 so I effectively own the property outright.  I can make unlimited online instant transfers b/t my checking account and the home loan (as long as I stay in front of the 30 yr payment schedule).  So what I do is put my paycheck directly into the home loan to reduce interest, leaving only about $200 in my checking account and then put everything on my credit card.  At the end of the month, I withdraw from the homeloan to pay my CC bill in full.  This has worked pretty well in reducing my interest and given me a lot of financial flexibility.  There were 0 fees to apply for, establish, or maintain this loan.

I want to buy an ~ $350,000 property in California and it seems that every bank wants several thousand in fees just to apply for a loan.  This seems a little excessive (why do I need to pay the bank a fee to give them money every month?)  I am probably going to take a 5/1 ARM because I expect to have the loan more or less paid off in 5 years and a tax-deductible 2.5% is pretty amazing.  Should I expect to receive a very similar financial flexibility to Australia?  Is it standard to be able to make early payments and then withdraw from these extra payments?

Also last time I lived in the US > 5 years ago, my credit score was ~ 690.  I have held a low limit US credit card and small student loan since then so hopefully it is a bit higher.  Is this enough to qualify for a very low home loan?  Or do you need to get very close to 850 for those?

Any advice on this situation would be very nice, I don't trust the advice I get from banks because they are just looking to sell products you don't need.

[Vitai Slade]

That withdraw feature from the home loan sounds like a fantastic idea! Unfortunately, I don't know of anyone that does that here. Perhaps a line of credit on your house would be similar? I don't know, I'm not too familiar with this. Once you pay into a loan, you don't get it back. It's kinda a one-way deal here.

A lot of banks want an "Origination fee" which is usually 1% of the purchase price of the house. If you are not desperate, these fees are usually negotiable, provided you have the credit to back it up. In fact, all bank fees regarding a mortgage are negotiable if you are good enough at it. They can't make money if they don't get your business, but at the same time, with rates so low, they might HAVE to charge those fees to pay their people. Usually these fees are paid at closing, not to apply.

I don't know too much about them, but I have no idea WHY you would get an ARM when you can get a fixed 30-yr at 3.25% or a 15-yr. for even less. The rate isn't going to get much (if any) lower than that. Fixed rates are the most popular and probably the best deal you're gonna get IMHO.

As for credit, 690 should be sufficient. The better it is, the more likely you are to get the mortgage, but if you have the assets to back it up, you should be fine. They look at EVERYTHING, not just credit score nowadays. It's a real pain in the ass.

[SnackDog]

If you put enough money down, you can get a home equity line of credit for a portion of that equity. This can be  done concurrent with the mortgage financing (same fees) and with the same lender - I did it with Wells Fargo a few years ago.  It is not straightforward so it could be difficult to arrange.

You should consider a 15 or 30 year loan at these rates and invest the rest.  Why tie your cash up in a house?

The biggest difference from Australia is how interest is deductible against income for your primary home (as opposed to only for rentals in Australia).

[Aussie]

My main justification with going with the ARM is to reduce the interest rate from 3.25 to 2.5 For the first 5 years when my principal will be highest and therefore the interest payments will be the highest.  I should be able to have it mostly paid off by then, but I guess the idea of stretching the mortgage as long as possible b/c it is tax deductible and then using the low interest rates to invest what I would have put towards extra payments is the way to go.

Any thoughts on the CU vs. commercial banks choice.  I like the idea of credit unions in general, but in Australia they kind of suck from what I've researched (higher fees, few ATMs, and generally slightly higher mortgage rates).

Hopefully, the bank will consider our Aussie investment property as a bonus and I can get down the fees.  I would consider myself a very safe borrower, but we'll see what they think.  Are mortgage rates negotiable at all?  I know it's an extreme example, but billionaires can get loans like this: http://www.bloomberg.com/news/2012-07-16/zuckerberg-s-loan-gives-new-meaning-to-the-1-mortgages.html

[samustache]

Are mortgage rates negotiable at all?

Not really. The best deal is a fannie/freddie conforming loan, there might be wiggle room in non conforming, but those simply won't be a better deal anyway. Conforming loans are low risk loans because they are effectively insured against default by the U.S. government and the wiggle room you see from lenders is really an illusion. Lenders will play with advertised rates, but the difference then shows up in closing costs. For instance, a lender may have a higher upfront rate with no origination fee, but then they recoup that fee when they sell the loan because it has an above market rate.

I've found the most expensive part of the loan is the title fee, so that's also worth shopping around for. I know of people that question and get a break on every single line item in the closing costs :)

You shouldn't have to pay anything for an estimate (some big banks charge $85 for this, but that's to keep you in line when they start bending you over the barrel as closing approaches), once they start ordering an appraisal and pulling your credit though, expect to pay for those.

Do you have U.S. credit history? If not, expect a painful experience. My stellar Canadian credit meant zilch when I bought my first house.

As alluded to above, the big banks are to be avoided (I avoid them in everything else as well). I've had the best luck with a high volume, low margin broker. Good luck!

[Aussie]

I do have US credit history - I have had a US credit card with $10,000 limit for almost 10 years now.  I also have ~ $5000 in student loans that I pay back with direct debit.  When I got the 690, I did not have to start paying the loans and my card limit was only $2,000.  So I am hoping it is higher now.

I pretty much don't use the card at all during the year.  But when I visit the US annually, I stock up on clothes/electronics (because it's so much cheaper) for myself and partner's family.  I don't pay any interest, but am a little worried because for one month a year the balance is generally pretty close to the credit limit.