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North American bank loan model for foreigners

By Fabiano Moreno |

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Just a few years ago, North American banks loan still offered a variety of programs.

They differ in fixed interest rates, confirmation of liability Refund terms, conditions and other qualifications.

Today there are still many different financing options, but financing banks are now limited to only the basic models, the “AMMUNITION”.

“ARM” means an adaptive rate loan, that is, a mortgage with a variable interest rate.

Since these loans may work very differently from the variable programs you may be familiar with in your home country, here is an explanation:

In general:

Variable rate mortgages can be fixed for a term of 1, 3, 5, 7 or 10 years. All of these programs share the following characteristics:

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All must have a maximum contractual term of 30 years.

In most cases you have no penalty for early payments, which means they are partially or fully refundable without late payment interest.

They have a set initial interest rate for the first few years. This will vary from 1, 3, 5, 7 or 10 years depending on the program you choose.

Also during the interest period there is the possibility of early repayment at any time.

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After the end of each period, the interest rate can be adjusted once a year – up or down, depending on market developments.

The interest rate, which is fixed for next year, does not depend on the intentions of financial banks.

Instead, it is based on the current index and a fixed margin contract.

The annual LIBOR rate is publicly recorded. It often serves as an index.

The gross profit margin is determined in accordance with the contract and as specified by the bank.

It usually ranges from 2.75% to 3.5%.

The margin remains at the same level throughout the period

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Let’s take the “five-year ARM” as an example: here the interest rate can be adjusted for the first time after 5 years.

To protect borrowers from unexpected increases in interest rates due to market changes, ARMs establish interest rate limits called “caps.”

For example, the credit limit is 2/5. This limit allows the interest rate to be adjusted up or down by up to 2% after five years, depending on market trends (indices).

During the remaining 25-year period, this amount can be adjusted once a year.

The contract’s fixed margin (see above) works as a “minimum” or minimum for the second upper limit to come into force, namely 5%.

Interest can therefore only increase by a maximum of 5% of the original total interest during the remaining term.

SIGNIFICANT:

You can pay at any time interest-free for late payments.

This means, for example, that you can increase your monthly payment amount if you expect your payment streak to increase, or make a single payment when liquidity allows.

The related loan amount will be repaid immediately. The interest portion of the monthly payment eases, the principal portion increases and the term eases over time.

But:

The annual premium will only be calculated at the next interest rate adjustment.

For example, after the initial fixed rate for five years and then every 12 months.

However, there are other loan programs. with geographic limitations, such as a 30-year fixed rate.

Most banks have withdrawn from the program because ARMs, or variable interest rate programs, are preferred.

What this shows in practice is Foreign investors generally do not borrow money in the United States for more than 7/5 or even 10 years and often sell their homes within this period and purchase new properties.

With the 30-year fixed interest rate, you can pay at any time without interest on late payments. However, the monthly fee remains the same until the last penny is paid.

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Another advantage in favor of variable models.

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