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A puzzle for you. The Mrs suggetsed to ask you here as she respects you guys.
Janet and I live in Costa Rica and have a lovely home worth about $500K, we have a mortgage of about $250K at 7% and have recently sold one of our properties in Florida (thank God) which nets us about $175K
We have enough income to keep us happy but with interest rates as low as they are at the bank, do we invest that money in some CD that pays us a lousy 4% per annum (if we are lucky) or would it be wiser for us to pay down our mortgage to cut our monthly expenses?
What would you recommend?
Personally I prefer not to pay bankers interest. The feeling of being debt free, only having to pay a little property tax once a year, and a roof over my head free and clear… is a real peace of mind… Who knows what the future may bring.
“do we invest that money in some CD that pays us a lousy 4% per annum (if we are lucky) ”
Like to know where you can get 4% on a CD?
FYI, 7% is pretty steep. May be OK rate for CR but crunch the numbers and take a careful look.Have you figured out your carrying costs per year? You have an eager partner in this house (the Bank) that would gladly take over if you have some misfortune or miss a few payments!!I face this same dilemma and wonder every day which road to take. We, too, have a 7% mortgage although that will begin to float against the LIBOR in a couple of years.
Our 7% mortgage costs an after-tax rate of about 5% since we’re in the 28% marginal tax bracket. That’ll go up when the “LIBOR Plus” rate kicks in.
You can get 4% on CDs at Costa Rican banks. At the nationally-chartered banks, they’re governmentally guaranteed, as with FDIC guarantees in the U.S.
So there’s about a 1% difference between keeping the mortgage and buying a CD. Of course, all that could change if the LIBOR rate goes up.
The question that nags at me is this: If I invest all my cash in paying down the mortgage, I’ll save about 1% and not have the debt hanging over my head. On the other hand, I lose flexibility. What if something happens and I need money desperately? I could cash in a CD, but how do I get equity out of my house on short notice? That’s especially true in Costa Rica where the banks’ bureaucratic procedures are slow and uncertain and lending practices seem not to be dependable.
Another consideration: For most of us, our financial futures are pretty much fixed. Once we’re collecting our pensions (if any) and Social Security, the only “raise” we’ll ever see is when we begin to withdraw our tax deferred savings. If we pay down/pay off our mortgages, then our monthly expenses go down. In effect, that’s a significant new “raise” later in life, when we may need it. Of course, that assumes that we’ll actually live long enough to see the mortgage paid off and enjoy the benefit.
For decades, our financial advisor, who took very good care of us, advised refinancing our mortgage every five years or so. His thinking was that equity in a home isn’t working very hard. We took his advice and came out ahead.
I dunno . . .
FYI:
The Cooperatives in Costa Rica (Cooperativas de Ahorro y Crédito) all pay far more attractive rates (more than double) on your deposits than the state or private banks….
For example:
At the moment, should you invest US$5,000 for a one year would give you around 4% at Coopenae (http://www.coopenae.fi.cr/), Coopeservidores (http://www.coopeservidores.fi.cr/), Coopeanade, Coocique (http://www.coocique.fi.cr/home.html), Credecoop (http://www.credecoop.fi.cr/credecoop/index.htm) and Coopepalmar but invest that same amount of money for the exact same period in a state bank would pay you only 1.06% and a private bank 2.22%
There are 67 Cooperativas de Ahorro y Crédito operating in Costa Rica with 705,000 accounts managing about 7.3% of the total savings in the country.
As far as safety is concerned? I honestly don’t know if there’s much of a difference…
You can also see the La Federación de Cooperativas de Ahorro y Crédito de Costa Rica FEDEAC R.L. website at: [ http://www.fedeac.com/ ]
Scott Oliver – Founder
WeLoveCostaRica.comPS. I don’t believe any of the Coop sites have an English version
Any income you make on such a deposit you will have to pay taxes on it back in the states, and your money will be tied in for a year. thus if you earn 4% in CR, depending on which tax bracket you are, you would more likely earn 2-3%, 7% interest on a morgage is very high these days. Even after taxes your looking at roughly paying 5%. However the question really is can you invest your doe and get more then 5%? any thing less and your losing money (at least in the short term). Its a personal choice really, If your retired and on a fixed income it may be safer just to pay it off. On the other hand, you could invest in a Duplex in SW florida NOT CR and for 100,000 you could get yourself an income of close to 1000 dollars a month after expenses, not to mention the tax breaks, including depreciation etc. Thats at least a 10% return. but there always the management headache of such a thing. Of course this is a little more of a gamble but maybe not when you look at the stock market. Anyway at the end of the day, I would try to invest in some income generating property or pay off the morgage, forget about fixed CD type of interest accounts with these you just buying time but losing money doing it.
Please note: I’m not a realtor, and don’t sell real estate, just trying to suggest an alternate.
[quote=”gzeniou”]On the other hand, you could invest in a Duplex in SW florida NOT CR[/quote]
And you have the additional problem of being far away from the investment property. You face the same issue as everyone else. No one knows what tomorrow will bring.
I would set aside what I thought was practical for an emergency fund, say $25K or $50K and pay down the mortgage with the rest and if it is possible to refinance at the same rate you are ahead. Fixed rate is best so you know what the payments will be from beginning to end.
[quote=” Our 7% mortgage costs an after-tax rate of about 5% since we’re in the 28% marginal tax bracket. That’ll go up when the “LIBOR Plus” rate kicks in.[/quote]
David – that is a very interesting statement. Do you have a US-based mortgage that is financing the CR home and you are claiming the interest on your US taxes, or is a CR-based mortgage and home and you are claiming the interest on your US taxes? Either way that is pretty clever and I would like to know how you are doing it!
If it is possible, I may want to follow your lead. Although I don’t have a mortgage presently, it may well be worth the effort to get a loan and “negatively arbitrage” the proceeds at a point or two loss in exchange for the piece of mind of having several hundred thousand dollars in the bank during these troublesome economic times. And who knows, the negative may turn into a positive if I can lock into a low interest mortgage and then the economy turns around and CD interest starts climbing.
I would really like to know how you are doing it – or if your comments relate to property owned back in the States.
Good morning, crbill.
Our mortgage is with Banco HSBC here in Costa Rica and it’s on our property (land, house and guest house) outside Grecia. The term is for twenty-five years. For the first five years, it’s at 7% fixed. After that, it’s LIBOR plus 3% with a minimum of 7.5%. The LIBOR is in the neighborhood of the current fed discount rate (almost nothing), so when the first five years are up it appears (appears) that our rate will go to about 7.5%, but of course that could change.
This is our second mortgage. We paid cash for the land and to build the guest house, but we were badly misled about the cost of construction here and shot our wad on those two. In order to build the main house, we needed construction financing.
We went to Stewart Title who got our financial records reviewed and provided a recommendation to the banks. At the time, only Banco Banex (now HSBC) was doing construction financing, so that’s where we went.
A couple of years later, we needed cash to finish some projects and went to another mortgage broker here. They shopped around and ended up renegotiating our mortgage with (now) Banco HSBC for a new term and a larger principal.
Reflecting on the original question posed in this topic (pay down the mortgage or not), I think I’d be very tempted to take Waggoner’s advice and keep a big chunk of cash liquid just in case something comes up. No doubt that would be my approach if I already had an affordable mortgage.
Nothing I read in the IRS Code suggests that the interest on a mortgage here in Costa Rica is not deductible on our U.S. federal income tax return. And for a couple of years we had an American CPA doing our tax returns.
Every year around February or March there’s a big home show on the outskirts of San Jose. There, the banks have some pretty attractive offers on mortgages. If I were at it again, I’d go to a Costa Rica-based mortgage broker again, like in October, get all my documentation in order, and sic the broker on the banks during that show.
Does any of that help?
I think I would be on the side of reducing your monthly expenses. At this point in life my monthly expenses are what I am most concerned with controlling. It seems you are not under any financial strain so I would use the 175K to pay down the mortgage. A 30yr. fixed for 250K is about $1,660/mo. so lets just say you’re 2 yrs. into the mortgage and your principal is now 245K use the 175K to pay it down to 70K, then for a flat fee ( probably around $250.00 ) you can then have your mortgage recast to 28yrs. and your payments would be around $475/mo. I’m assuming the 7% mortgage is from a bank in CR and you would be in the same neighborhood if you went through the time and expense of a re-fi.
[quote=”DavidCMurray”]Good morning, crbill.
Our mortgage is with Banco HSBC here in Costa Rica and it’s on our property (land, house and guest house) outside Grecia. The term is for twenty-five years. For the first five years, it’s at 7% fixed. After that, it’s LIBOR plus 3% with a minimum of 7.5%. The LIBOR is in the neighborhood of the current fed discount rate (almost nothing), so when the first five years are up it appears (appears) that our rate will go to about 7.5%, but of course that could change.
[/quote]
Wow!!!, seems like a very high risk mortgage to me, If inflation returns (it will, its just a matter of time), your interest rate is going to sky rocket, and the min 7.5% seems very high on an adjustable rate to start with. In the states with decent credit you can get a jumbo for 4.5% fixed for 30. In any event, I would get out of that monster and get a fixed at least.
gzeniou, I agree with your sentiments in every respect save one. They’re not reflective of the reality on the ground here in Costa Rica.
Costa Rican banks don’t offer fixed-rate long term mortgages. And the interest rates they do offer are in no way dependent upon or related to interest rates in the United States.
Our FICO score is in excess of 820 and has been for years. Our income is as dependable as anyone’s. But none of that will buy the kind of mortgage you allude to here in Costa Rica. If they did, I’d be the first one on the bandwagon.
Just for comparison, you might be interested to know that Banco HSBC offered me, a preferred customer, a VISA credit card at a rate of 3.0%. That sounded pretty good ’til I learned that they meant 3%[u] per month[/u]! I smiled and declined.
Credit card rates here run about 24% to as much as 55% per annum. In that context, my LIBOR plus 3% hardly seems disproportionate.
None of this is to say “cheap”.
[quote=”DavidCMurray”]
Costa Rican banks don’t offer fixed-rate long term mortgages. And the interest rates they do offer are in no way dependent upon or related to interest rates in the United States.Credit card rates here run about 24% to as much as 55% per annum. In that context, my LIBOR plus 3% hardly seems disproportionate.
None of this is to say “cheap”.[/quote]
I was not aware of this, thanks for letting us know. The issue will this is that most Expats are on fixed incomes from the states, sounds like gringos should stay away from the CR credit market. I have to say I don’t use my US credit cards in the CR, they charge 2-3% per transaction and the merchants also won’t give you the 5% discount for cash, meaning using colonies saves us about 8%.
Just an idea…….. most Expats have a house back in the states or did before transporting to CR. It could be much cheaper to get a home equity loan (on your us house) in the states for your home purchase in CR (much lower rate and fixed at that) and then you could rent out the US house. Perhaps your rent will cover the loan payment while paying down the loan, not to mention the tax breaks and one day in the future the US house may appreciate too.
[quote=”gzeniou”] Just an idea…….. most Expats have a house back in the states or did before transporting to CR. It could be much cheaper to get a home equity loan (on your us house) in the states for your home purchase in CR (much lower rate and fixed at that) and then you could rent out the US house. Perhaps your rent will cover the loan payment while paying down the loan, not to mention the tax breaks and one day in the future the US house may appreciate too.[/quote]
David is right. You are at the mercy of the lending institutions down here. We sold our house in california and paid cash for this one.
The housing market in the States right now has so many owners with minimal equity or upside down it isn’t practical to think about refinancing or a second.
gzeniou, you’re absolutely right that taking equity out of a home in the U.S. and using it to purchase in Costa Rica would make great sense — on paper.
The problem, as waggoner has stated, is that many folks’ homes have little or no equity to borrow against. And if the news is any indication, the banks generally aren’t in a lending mood. What’s more, if one pursues a mortgage on a property in the U.S. and the bank learns that it won’t be owner-occupied, that opens up a whole new set of considerations. Then it becomes a matter of looking for investment financing.
I think, too, that many Americans see (or think they see) Costa Rica as a place to retire that they can actually afford. If their finances are so precarious that they’re willing to leave the U.S. to find an affordable alternative, then they’re probably just the ones whose finances are insufficient to convince an American banker to make a new loan. Of course, the Costa Rican bankers will see that, too.
As waggoner says, if you can qualify for a mortgage here at all, you are truly at the mercy of the bankers in Costa Rica. It’s a “take it or leave it” situation in which aspiring borrowers have few options.
The only silver lining in this cloud is that the mortgage interest one pays here is deductible on federal income tax returns, so in effect the U.S. government is affording us a modest subsidy to carry this debt.
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