Closing costs are expensive... ...even in
Costa Rica
The most common
"surprise" to those obtaining Costa Rica Financing is the cost of closing their loans. Many people perceive closing costs
to be sharply higher in Costa Rica than in the US. As in the US, these costs can be taken out of loan
proceeds and financed within the mortgage if the Loan to Value threshold is not
exceeded. Financing closing costs is an option which can mitigate the need to bring a checkbook to closings.
Though Costa Rica financing is, in fact, more costly than mortgage financing in the US, the
"surprise factor," however, with closing costs is generally a function of
visibility. There's a lot of cost
incurred by US borrowers which is priced directly into their loans and not
visibly paid upfront as a lump sum at closing. A comparison of mortgage closing costs in Costa Rica vs. the US and some
insight into the differences are as follows:
Bank
Commission/Points: This is generally the primary sticking point
for borrowers, as Costa Rica Lenders generally charge 1.5%-2.5% bank commission at
closing. Key points to realize, however,
include:
1) Bank commission
in Costa Rica reflects the cost of significant lender risk which most US banks
will not incur for any price.
Significant benefits which foreign borrowers enjoy for this added cost in
Costa Rica, not available in the US, include:
-
Property
can be held in a corporation, significantly reducing the liability typically
associated with home ownership.
-
There
is no reporting to US credit agencies for loans received from Costa Rican banks.
Your mortgage debt will not impact your ability to borrow in the
US. Late payments will not impact your
credit rating.
-
There
is no personal recourse in the event of a default.
2) Many programs
offered in Costa Rica do not have prepayment penalties as is common in the US. The bank commission charged upfront often reflects
the financial cost (often a loss to the bank) of loans which are paid off in one to two
years.
3) In the US,
lenders price individual loans (interest rate and points) based on a variety of
factors. Once a "par price" is quoted
for a loan, borrowers may "buy down points" by trading off interest rate for
upfront bank commission. In Costa Rica,
lenders have just begun to vary their terms based on individual borrowers and
loan parameters, however, they generally price their overall loan programs at a macro level and
do not offer borrowers the ability to "buy down points", as is widespread
practice in the US.
Title
"Protection" Policies: Unlike in the US
where banks mandate it, Title "Insurance" is not required by many Costa Rican banks. Lenders in Costa Rica generally do their own
title work and part of the bank commission charged reflects their cost for self
insuring the risk of title problems. Banks are generally confident that the
title research performed by their attorneys is as thorough as could be
performed by a third party and understand the different limitations of title
"policies" available from the four firms currently offering them in Costa Rica. Title protection policies from
the four current providers range in cost from .25% to 1% depending on the
provider and the channel through which it is purchased.
Two out of four
current providers of "Title Protection" policies in Costa Rica offer mortgage
broker services and
are promoting them to grow revenue and market share. The "Title and
Escrow Services" firm most currently active in seeking mortgage
business publicly misrepresents bank policy where Title Guarantee is
concerned and
informs customers that it is a bank requirement when it's not. Even when the banks require "Title
Guarantee", it is only for the amount of the loan. This "Title and Escrow Services" firm requires their
mortgage customers to purchase a policy based on the full purchase price. There are no laws in Costa Rica which require
them to fully disclose lender policies, as there is in the US.
At Costa Rica Mortgage, we do not sell any products or services other than mortgage
brokerage. We do not advise our clients
on whether they should purchase "title protection" or from whom. We do, however, fully disclose what a lender
requires in terms of "Title Protection".
Legal
Fees: Costs
for mortgage legal expenses can be much higher in Costa Rica, as legal fees are
typically charged on a percentage basis rather than a flat fee. Consequently, the difference in legal costs, between a US
mortgage transaction and a Costa Rica transaction will vary commensurately with loan size.
Mortgage
Brokerage: 64% of US mortgage transactions are
facilitated by Mortgage Brokers, as borrowers generally understand that by using
a competent broker, they'll save significant money, time and hassle.The going rate for mortgage brokerage
services in Costa Rica is 1.5% which is generally lower than earned by brokers
in the US. At Costa Rica Mortgage, we believe we provide
disproportionate value to every client for our fee on several dimensions.
In the US, the
mortgage industry is a highly regulated, evolved and systematized
industry. Though borrowers generally
don't have direct visibility to more than 1% mortgage brokerage commission on
their closing statements, brokers typically earn between 2% and 5% on every loan. US mortgage brokers are primarily compensated
by the lenders through rebates and "yield spread", where they can earn extra
commission by selling loans at a higher rate than the bank proposes (par price)
for an individual loan. Borrowers pay
much higher broker commissions in the US than in Costa Rica; however, they pay
it monthly over many years.
The lending industry
is maturing rapidly in Costa Rica and there will come a day when brokers are
compensated by lenders. However, broker
compensation in Costa Rica is thus far limited solely to fees paid directly
from borrowers.
Property
Transfer Taxes and Legal Fees: These are paid
at closing when the financing provided is associated with a property
purchase. Depending on the means of
transferring ownership, the cost of title transfer in Costa Rica can be much
higher than in the US, as transfer taxes and legal fees are costly. However, if a property is held in a corporate
name and the buyer acquires the property through the transfer of corporate
shares, the cost of Tax and Legal fees for acquisition can often be less than in the
US (depending on the property, sales price and state).
In whichever manner that ownership is transferred, however, the
associated costs have nothing to do with the cost of financing and should not
be construed as such.
At Costa Rica Mortgage, we strive 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 found the above information useful and informative. More to
come.
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.
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From