In my previous blog about Canadian mortgages vs. American mortgages, I went over a few of the more important issues you will run into buying south of the border. This includes amortization periods, fixed-interest rates, and the differences between the no-recourse and recourse states. I’m going to try and cover what are the more important points remaining, but, as always, you should consult with a trusted professional before going out and making a purchase.
It’s true that the waters tend to get a little murky on the topic of non-recourse states. I am not by any means providing this information as a way of encouraging anyone to walk away from their property if they can’t pay their mortgage. Rather, what you may find in these states is that there can be enhanced restrictions on the lending institutions as a result. That and you would be wise to be extra cautious when dealing with lenders, as enhanced restrictions will always bring out a few opportunists.
Which Mortgage recently ran a piece that quoted a broker working for a company that provides US mortgage options to Canadians. In it, they are quoted as saying that unlike Canada, in the US there are “literally thousands of banks and little mom-and-pop-shop lenders that have their own guidelines and make up their own rules.” The broker went on to describe the US mortgage industry as the “Wild West,” and pointed out that every state has its own rules. Most lenders have become more conservative with borrowers after the 2008 housing crisis, but this is hardly reflected in the private mortgage insurance.
PRIVATE MORTGAGE INSURANCE
In the US as in Canada, borrowers with less than 20% for a down payment are required to obtain private mortgage insurance. However, there is a huge difference in how long they are required to keep it. In Canada, you must you pay this insurance up for the life of the loan. In the US, the borrower can request it be eliminated once they reach 20% equity in the home. Not only that, the lender is required to cancel it once the equity in the home reaches 22%.
Some states, such as Florida (actually a recourse state) are anomalies. For example, Florida has an exemption for investment properties that aren’t primary residences. This can help shield assets from collection, and if an investment property is put into an LLC, it completely limits recourse to any assets held by the LLC.
It’s common knowledge that mortgage interest rates are higher in the US than in Canada. In Canada, a b-lender or alternative lender is usually priced around 5%. As such, if you’re thinking about buying property south of the border, don’t get too attached to your 2.5% interest rate. Unlike Canada, where the mortgage interest is applied to your mortgage semi-annually, your mortgage interest in the US is applied on a monthly basis. In the US, you are also free to pay off your mortgage any time without penalty, though you will incur bigger fees out of the gate.
TAX-DEDUCTIBLE (FOR REAL)
In the US your mortgage interest is tax-deductible. Yes, are you read that right. As a result, owning a home in the US can be more advantageous financially on a year-to-year basis.
THE LONG AND SHORT OF IT
If you are thinking of buying a place in the sun, or looking for an investment property in the US, do as much research as you can prior. It’s also a good idea to see if your broker can direct you to someone who’s already bought property in the US, and can give you some friendly pointers or tips. There is much to be gained, but also losses to be had, should you overextend yourself. Sound advice and proper representation will ensure you don’t get the short end of the stick.