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Chapter 10 - Financing

The dream is to buy that vacation home with cash – a life’s hard work finally buying some play. In fact, cash used to be practically the only way to buy property in Costa Rica, and it remains the easiest. Your negotiating position is stronger, the final cost of the property is lower, and there is one less set of forms and fees to deal with. For a variety of reasons, however, cash transactions are not always possible or desirable:

There could be liquidity issues. You found the right property, and you have the money to pay for it, but the funds are locked up in an illiquid asset that will take some time to unload. Meanwhile, the seller wants cash, and has another buyer on the line.

Credit could help you leverage your savings. For example, if your savings will cover the property you want, but with an additional loan you could buy a whole farm and sell off the other lots at a profit.

Or maybe you simply want a second home and also want to keep you liquid assets – you can afford bank credit, and if you can get it, why not use it?

This chapter will give an overview of financing in Costa Rica – what your options are, how much they will cost you, and what kind of unique risks they present. Twenty years ago, there was virtually no way – outside rich uncles or loan sharks – for a foreigner to borrow money. But consider that in 2007, foreigners brought $640.6 million in real estate investment to Costa Rica, according to the Central Bank. Banks have woken up and smelled this money, and today there is an ever-widening field of financial products available for real estate transactions.

Financing in Costa Rica, however, can be substantially different from financing in a major developed economy. As for local banks, one thing retirees will notice immediately is that there are no age discrimination laws here to restrict lending practices. Banks will tell you right on the loan application that they will not grant a loan whose length plus the age of the borrower add up to more than 75. Expect rates to be higher as well, as loans in developing countries always have a bit of a risk premium. Likewise, forget about 30-year fixed rate loans. Currently, local mortgages in Costa Rica offer five years fixed, maximum.

Of course, there are options other than local banks. A handful of foreign banks also grant mortgages to foreigners buying property here, although they operate strictly through brokers, since it is illegal for them to advertise their services in Costa Rica. Also, for short-term financing, this country has any number of shadowy individuals willing to lend large amounts of cash at high interest rates and with steep and swift penalties for missed payments.

This chapter will first look at local bank lending, including public and private banks, and discuss some of the instruments available to foreigners. Next the chapter will look at mortgages with foreign banks. The third part of the chapter will take a look at so-called “hard” lenders, including some advice as to when one should take advantage of their services and when to stay away. The fourth part will discuss purchasing property with retirement funds from your IRA. And finally, the chapter will touch on some topics ancillary to financing – for example, escrow, bank transfers, currency – to help you decide the best way to pay for a purchase, with or without financing.