Financing Property In Florida

At first glance, there are enough similarities in terminology to make Brits buying property in Florida think that the mortgage system will be quite easy to find their way round … so they can put that to one side for the moment and concentrate on finding a great property at the right price.

Wrong!

The one thing that every UK citizen buying in Florida must remember at every single stage of the process is to never make any assumptions about how things work in Florida. Yes, some differences are minor – but others might just make the difference between a successful purchase and disaster. You must remember that to the average person in Florida, the system they have is the only system in the world, so they will not be going out of their way to highlight any differences to you.

The only way to guarantee the success of your Florida property purchase is to arm yourself with as much factual information as possible – and get relevant advice from the right people. The “right people” in this context are people in the business who have specific experience of dealing with British clients looking for not just any mortgage in Florida, but the same type of mortgage you are looking for.

Mortgage Types

Many of the popular types of mortgage available to British citizens buying in Florida will generally be familiar – in particular the basic fixed rate and adjustable (variable) rate mortgages. However, there are many variations on these themes that have no real UK equivalents – as well as a whole raft of programs and offers that are really only suitable for special case USA citizens.

FIXED RATE MORTGAGES
These have traditionally been the most popular type of mortgage in Florida. With a fixed rate mortgage, you pay both capital and interest over a fixed period of (usually) 10,15,20 or 30 years at exactly the same monthly payment for the duration of the loan.

This suits people who value knowing exactly what their repayments are going to be over the long term and don’t want to take any risk of being affected by rising interest rates.

ADJUSTABLE RATE MORTGAGES
Adjustable rate mortgages (like UK variable rate) in Florida usually have a fixed interest rate for the start of the term (typically one, three, five or seven years), after which the rate is adjusted either once every six months or once every year (depending on the mortgage) and fluctuates in line with independent published financial indexes. There is a specific form of ARM that is proving very popular with people buying property in Florida – especially where rental income is involved. This “Option ARM” is covered separately below.

INTEREST ONLY LOANS
Interest only loans are popular in Florida for investors or individuals who are looking at their property as a shorter-term investment. When you take out an interest only loan you are only paying the interest due and the total amount borrowed is still due at the end of the loan. This is the lowest payment you can make without actually increasing the amount owed.

“EQUITY BUILDER” MORTGAGE
These may have different names, but the underlying idea is instead of the normal monthly payments, a payment of approximately half that amount is paid every two weeks. The loan's 26 biweekly payments each year pay off a loan faster than 12 monthly payments and can save thousands of dollars in interest over the life of the loan compared to a similar 30-year monthly payment mortgage.

SPECIAL CASE MORTGAGES
You will sometimes see references to things like “piggyback” or “balloon” loans. These are just a couple of examples of a wide variety of special case mortgages that are designed to serve very particular circumstances. The construction of these loans can be quite complex, sometimes involving multiple loans that are related to each other, or highly front- or back-end weighted payment schedules.

Suffice to say that there is a mortgage structure for almost any situation, and once they understand your circumstances, your mortgage broker will almost certainly be able to find a suitable mortgage to fit the situation.

THE OPTION ARM
The Option ARM (Adjustable Rate Mortgage) has a variable interest rate that fluctuates in line with independent published financial indexes just like a regular ARM.

The key difference is that each month your statement gives you typically four different payment options to choose from.

… and you actually get to choose which one you make.
There are some variations on the theme, but the most common payment options are:

• Minimum Payment. This is the lowest of the four payments and is like making the minimum payment on your credit card. With this payment you are paying neither the principal nor the entire amount of interest due on the loan. The interest that you leave unpaid this month gets added back into the interest due on the loan and this increases your actual loan balance.
  
  
  
• Interest Only Payment. This option is the second lowest payment type. With this payment you avoid deferring interest and increasing the amount of the loan (which is what the minimum payment does) but at the same time you are not actually reducing the amount of capital owed.
  
  
  
• 30-Year Payment. Also called the “30-Year Fully Amortizing Payment”, this is the equivalent of the payment that someone makes on their standard 30 year mortgage, going towards repaying both principal and interest. If you made this payment every month, you would pay off the loan in 30 years.
  
  
  
• 15-Year payment. This is similar to the 30-year payment, but is an accelerated repayment option that would result in the loan being repaid in 15 years if you made this payment every month.
  
  
  

The idea is that you can modify your payment behaviour month by month as your circumstances dictate. The difference between the minimum payment and 15-year payment options can be around 100% - that is, the option of paying between $1000 and $2000.

Although the Option ARM is applicable to anyone who has a fluctuating income or who values the extra flexibility it offers in managing household finances, it is especially attractive to people with an investment portfolio (offering the flexibility of putting their money into higher yielding investments when the opportunity presents itself rather than tying it up in their mortgage) – and to people relying on rental income to pay the mortgage.

An Option Arm allows you to reduce your outgoings in the months when rental income is low – or when you have extra property related costs to cover – and re-invest a bigger proportion of the income during the months of fuller occupancy.

This can be a massive help in managing a positive cash-flow as well as allowing you to finance minor emergencies without having to inject extra cash into the “Florida property” part of your bank account.

There are two possible “downsides” of an Option ARM:

• Variable Rate. There is a degree of risk associated with the interest rate being variable rather than fixed for the full term.
  
  
  
• Management. This is an active mortgage – you have to be prepared to study the monthly statement and make an active decision about what you are going to pay.
  
  
  

MORTGAGES FOR RENTAL PROPERTIES

As well as the different types of mortgages available, it’s important to understand that there are different types of mortgages depending on the use you plan for the property. There are certainly different rules for mortgages on properties as primary residence, second homes and as investments – and sometimes there are different or additional rules for foreign residents on top of those!

You must ensure however, that you – and your advisers – are completely open about why you are buying a property in Florida, or it is very easy to fall into a trap that can have serious consequences.

For example, as you research the market, you may see advertisements featuring loans of up to 80% of the property value – an attractive proposition that may increase your buying power.

However, these loans are typically only available on properties that are for your personal occupation as a primary or secondary residence – and are specifically not offered on rental properties. Some agents and brokers may be less than open about these factors until you are presented with the final documents to sign.

This can result in you being literally at the eleventh hour and closing on the property, with a difficult decision to make. Do you pull out of the deal and potentially lose the property (and your deposit) while you find a mortgage that is properly designed for your planned use, or do you sign a document you know to be false? The latter course should not really be up for consideration as the potential consequences are unthinkable – under Florida law, this would count as perjury.

That’s a classic example of the need for an experienced mortgage broker who understands your situation – especially the fact that you are from the UK – and can guide you through the Florida mortgage system.

Getting the right type of mortgage can also be a consideration when you are signing the contract that commits you to purchasing a property. As I said before, it is common for such contracts in America to carry “contingencies” – which you can think of as “what-if’s that might stop you going ahead with the purchase.

A number of contingencies are almost standard in such contracts, but if you are a British buyer of a property you plan to rent out – you need to have a special contingency in your contract that allows you to back out of the deal if you cannot get the type of investment mortgage you require for this purpose. Without that clause, you would be committed to either buying the property with a mortgage that doesn’t allow you to rent it out, or perjuring yourself to mortgage the property as a primary or secondary home.