Author Topic: Mortgages in the US - redraw and offsets  (Read 1288 times)

Kaminoge

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Mortgages in the US - redraw and offsets
« on: September 15, 2018, 06:06:01 PM »
Hi All,

I'm an Australian and just getting started on researching housing loans in the US. If we did get a loan it would be taken by my American husband, not me, I'm just trying to get a feel for things there.

I'm trying to find out if offset accounts exist (it seems to me that they don't) and what the norm is on redraw facilities for loans in the US. I've tried googling but I'm not having much luck on finding information. I'm wondering if it's because they aren't a thing or if it's because I'm not googling the right way.

In Australia, when I buy property I tend to borrow more than I need and just stick it in an offset account. It's a nice way to keep liquidity and I'm not the type who would find herself redrawing it for silly purposes so it works quite nicely. Paying extra and being able to redraw it without penalty would have a similar result.

Is this a thing in America? If it is can you point me to any particular lenders I should be looking at for details.

Thanks

Kaminoge

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Re: Mortgages in the US - redraw and offsets
« Reply #1 on: September 15, 2018, 09:47:53 PM »
Thanks.

So as some follow up questions:

1. Are there any features of mortgages in the US that make them "good" - ie things we should look for if we do go down the path of getting one?
2. Should we then try to borrow the absolute minimum necessary?


maizeman

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Re: Mortgages in the US - redraw and offsets
« Reply #2 on: September 15, 2018, 11:12:00 PM »
So the "offset account" is actually part of your mortgage in Australia? You could certainly borrow more than you needed to by making a smaller downpayment and then save the money you would have used for the rest of a downpayment in a separate account, but the mortgage company wouldn't be involved. If you're still putting down 20% of the purchase price there wouldn't be an interest rate penalty to putting down less and saving the balance in another account. If you go below a 20% downpayment, you'll end up paying a higher effective interest rate.

No matter who sells the mortgage to you, vast majority (90+%) of residential single family home mortgages in the USA are ultimately going to be either resold to, or insured by the US government through one of three government sponsored enterprises, which means they tend to be rather standardized to fit the requirements of those agencies. Look out for mortgages with pre-payment penalties, but these tend to be rare. Look out for adjustable rate mortgages. I cannot think of anything else in particular to look out for mortgage-wise.

Kaminoge

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Re: Mortgages in the US - redraw and offsets
« Reply #3 on: September 15, 2018, 11:50:55 PM »
Thanks. Did you mean look for mortgages WITHOUT pre-payment penalties?

An offset account isn't part of the mortgage. It's a separate account but anything in it is offset against the mortgage. So, for example, if I owe $100,000 and have $40,000 in my offset account I only pay interest on $60,000. The money in the offset account is just my money, so I can transfer it wherever I want. Say I decide to transfer $10,000 to my credit card I'd then be paying interest on $70,000 of the $100,000 I owed. So, lets say I want to buy a property worth $300,000 (which won't get you much in Australia) and I have $100,000 I might decide to borrow $250,000 put in $50,000 of my own and put $50,000 in an offset account. That way I'm only paying interest on $200,000 but that $50,000 is still there if I decide I want it for something else, it's not tied up in the mortgage in the same way it would be if I'd only borrowed $200,000 and put $100,000 of my own into the house.


Dicey

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Re: Mortgages in the US - redraw and offsets
« Reply #4 on: September 16, 2018, 12:09:14 AM »
How long do you plan on living in the US?

Dicey

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Re: Mortgages in the US - redraw and offsets
« Reply #5 on: September 16, 2018, 12:13:04 AM »
I should add that the main advantage of US mortgages is that they are fairly easily tax deductible - up to $750k. This is woefully insufficient for some HCOLAs, so my next question would be where do you plan to buy?

maizeman

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Re: Mortgages in the US - redraw and offsets
« Reply #6 on: September 16, 2018, 12:41:04 AM »
Ah yes. Look out for AND AVOID both adjustable rate mortgages and mortgages with penalties for prepayment.

Okay I think I understand the concept of an offset account now. As lhamo said you could probably create something similar with a mortgage for well less than the total assessed value of the house plus a HELOC, but I don't think we have anything which would provide the equivalent set of functionality as a single financial instrument.

Kaminoge

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Re: Mortgages in the US - redraw and offsets
« Reply #7 on: September 16, 2018, 02:41:42 AM »
Avoid adjustable rates. That's one for me to think about. Pretty much all of our mortgages are variable rate here.

I don't plan on living in the US. We might at some point in the future (which would involve visa issues) but we're more just trying to dabble in real estate to diversify our portfolio. Basically I have a quite a bit invested in property in Australia but am woefully lacking in shares/bonds. He has everything in shares in the US (in index funds, not individual shares) but until recently no property. Currently I'm trying to get more shares/bonds in Australia, he's trying to get more bonds and property. We bought one place in the US (so cheap to an Australian!) but we just paid cash, now we're looking at a second place and considering a third. If we went for the third we'd probably take a mortgage for around 60% of it.

Unless something comes up to change our minds we'll probably just buy in Jacksonville (Fl), it's where he's from, where his family is and where they're likely to stay, if we do ever decide to live in the US there's a good chance it would be for family reasons and that's where we'd be.

I realise this might not be the most well thought out plan. Right now I'm in a learning phase. It's just the plan as we're thinking right now. For too long I've just avoided thinking about investments at all and simply put all my money into property (hey, it could be worse, I could have been spending it) but I'm trying to get a handle of things and make some sort of actual plan now.

maizeman

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Re: Mortgages in the US - redraw and offsets
« Reply #8 on: September 16, 2018, 02:48:24 AM »
Yeah, the USA is weird like that. From what I've heard and read almost no where else in the world can you lock in relatively low interest rates for 30 years.

And frankly I wouldn't want to lend anyone money at only a percent or two above current inflation with no idea what inflation or interest rates would look like decades from now and knowing that there was only downside, since if interest rates dropped the people I lent the money to would just refinance at the lower rate, but if they rose, I'd still be stuck charging them below market interest.

But that's exactly what the most common product offered in the US mortgage market is.

Kaminoge

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Re: Mortgages in the US - redraw and offsets
« Reply #9 on: September 16, 2018, 03:18:33 AM »
Well I think we can all trust that if the banks are doing it they're making money off it! It's like our offset accounts. If everyone was like me they'd be an absolutely terrible product for the banks but I think it's safe to say enough people use them poorly (ie see it as money they can spend which they might not have if it had already gone on the mortgage) that the banks know they're making money off them.

Once upon a time in Australia (and maybe other places?) our credit cards offered that you could either pay a yearly fee or pay a higher interest rate. People like me jumped at the chance to pay a higher interest rate (who cares what the interest rate is if you never pay it). The banks got rid of that long ago so I'm guessing that was one perk that too many consumers were able to handle responsibly.

Dicey

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Re: Mortgages in the US - redraw and offsets
« Reply #10 on: September 16, 2018, 03:28:45 AM »
Stocks and bonds don't require maintenance and upkeep. Their roofs never leak. If you want a piece of the US Real Estate market, consider REITs. Buying individual single family homes is like buying individual stocks instead of index funds. Buying SFHs halfway across the globe is inefficient, to say the least.

Kaminoge

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Re: Mortgages in the US - redraw and offsets
« Reply #11 on: September 17, 2018, 11:47:08 PM »
Yeah yeah, I know. My head gets all that but there's something just so pleasing about the idea of buying real estate. Apparently many Australians suffer from an obsession with it, I'm in recovery but I still like the idea.

I'm not buying from halfway across the globe, I'm researching from half way across the globe. If we do decide we want to buy a house we'd do it while we were there (or at least put things in motion while we were there). But I know from a practical point of view you're probably right. Which doesn't mean I'm necessarily going to take your advice, but I do accept it's good advice.

Dicey

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Re: Mortgages in the US - redraw and offsets
« Reply #12 on: September 18, 2018, 04:25:33 AM »
Hmm, feels like we're kindred spirits. The offered advice is from a been there, done that perspective. I used mortgages and levered my way into my rentals. If I had a big chunk of money, as you do (and I did not way back when), I would give stronger consideration as to how to best deploy my green army. Paying cash is the part of your plan that gets me. If you invested in the markets, you might get better results for far less work. That being said, I totally understand the lure of real estate ;-)

patchyfacialhair

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Re: Mortgages in the US - redraw and offsets
« Reply #13 on: September 18, 2018, 02:46:48 PM »
What would be your use of the Jacksonville property? A rental property? A place to park some cash but sit empty?

If it's the latter, just put some money in a mutual fund and call it a day. Because every time it rains in Florida (every day), you'll be wondering if the roof sprung a leak or if a gator made its way inside. If it's the former, you'll probably only be able to finance 75-80% depending on the bank, and the rate you'll pay will be higher, since the lowest rates are usually for owner occupied residences..

Look for fixed rate mortgages, with no prepayment penalties, and low upfront costs. After that it's just math to compare from bank to bank.

boarder42

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Re: Mortgages in the US - redraw and offsets
« Reply #14 on: September 19, 2018, 06:51:17 AM »
so you're looking to buy a rental property which is incredibly different than a primary residence.  You should go check out bigger pockets and learn there.  As for mortgages you get the lowest fixed rate 30 year mortgage you can find for a rental or personal residence and take your profits and invest them or buy more rentals.

Capt j-rod

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Re: Mortgages in the US - redraw and offsets
« Reply #15 on: September 19, 2018, 07:10:31 PM »
I used to question the fixed rate mortgage as far as inflation and the term especially with the crazy low interest rates. I have 30 year fixed at 3.5% interest from back in 2012. I think the reason for them doing this was because most people move every five years. Bigger house, new job, better neighborhood, etc.... The few permanent people will win but the vast majority will pay the higher rate with their bigger, better, newer, houses.

boarder42

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Re: Mortgages in the US - redraw and offsets
« Reply #16 on: September 19, 2018, 07:40:17 PM »
I used to question the fixed rate mortgage as far as inflation and the term especially with the crazy low interest rates. I have 30 year fixed at 3.5% interest from back in 2012. I think the reason for them doing this was because most people move every five years. Bigger house, new job, better neighborhood, etc.... The few permanent people will win but the vast majority will pay the higher rate with their bigger, better, newer, houses.

Yep. Though higher rates could drive people to stay very upgrade as rates rise.