Costa Rica Financing Secrets Revealed – How mortgages in Costa Rica are different? Part I

As Costa Rica’s leading source for real estate financing, we field numerous daily requests from folks in all stages of property acquisition/ownership in Costa Rica.

The majority of these inquiries come from North Americans who’ve obtained financing previously but never in a foreign country. Consequently, their investigation of financing in Costa Rica generally centers around understanding how it differs from previous North American transactions.

Only two years ago there were no conventional financing options available for foreigners in Costa Rica. Since then, several institutions have entered the market and the programs continue to rapidly evolve in pursuit of mirroring US bank offerings.

The dimensions on which one can evaluate the differences between North American and Costa Rica residential financing are:

1. Interest Rates
2. Closing Costs and One Time Fees
3. The Process from Application to Close
4. Program Structures
5. Borrower Eligibility

The following is the first of two articles where we’ll highlight the primary differences utilizing the above framework.

Chapter 1: Interest Rates in Costa Rica.

Market Forces are Swiftly Driving Parity Between US and Costa Rica Mortgage Rates

One year ago the interest rate for financing a second home in Costa Rica was 3-4% higher than in the US. There was little competition for financing foreigners in Costa Rica and the words, “Mortgage Meltdown” did not yet label the current US crisis. In the same period where the cost of market risk has mushroomed in the US as a result of the meltdown, Costa Rica’s risk profile has gradually declined.

Despite dramatic recent interest rate cuts in the US, mortgage rates in the US have not changed much. US market risk has driven the margins charged on top of key indexes higher, almost in step with rate cuts. The spread between mortgage rates and the critical 10-year Treasury Note (3.57 percent on Feb 1) is over 2 percent for the first time ever.

All of the mortgage products currently available to foreigners in Costa Rica are based on either Prime (Note 1) or LIBOR (Note 2) plus a margin. Most Costa Rica lenders have generally not changed the margin charged on top of these indexes over the last two weeks and foreigner rates have dropped significantly in step with Prime and LIBOR.

Programs offered by these lenders generally have a minimum rate ranging from 7% to 8%. Recent cuts in rate indexes have witnessed the first time that some lenders are exercising minimum rate clauses in their loan programs. Programs still in their infancy.

As we currently stand in the middle of Costa Rica’s 2008 high season, financing rates for foreigners are only 1-2% higher in Costa Rica than in the US. Second home mortgage rates in Costa Rica are generally 7% to 8% versus 6% to 7% in the US. This rate comparison is not entirely apples to apples where loan terms and conditions are concerned, however, the differences in program structures which exist today are no different than one year ago.

Risk, competition and the early maturation of foreigner financing in Costa Rica as an industry segment are the natural market forces which have cut the difference between US and Costa Rica mortgage rates for foreigners in half over the last year.

Our Costa Rica Mortgage company strives to serve our clients as financial consultants. We know that providing complete, unbiased information and transactional transparency will generate greater profitability than salesmanship for our company over time. We hope you find the above information useful and informative. More to come…

(Note 1): Prime rate is a “common benchmark for consumer and business loans set by banks, usually at a level 3 percentage points higher than the Fed Funds rate. The rate given to consumers on their loans is often determined as the prime rate plus a certain percentage, which represents the lender’s assessment of the risk in lending, plus its profit margin.”

(Note 2): LIBOR “stands for London Interbank Offered Rate. It’s the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate. It’s an index that is used to set the cost of various variable-rate loans, including credit cards and adjustable-rate mortgages.”

You can read ‘Costa Rica Financing Secrets Revealed – How mortgages in Costa Rica are different? Part II’ here.

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.