Should You Use A HELOC To Buy Property Overseas?

As real estate prices rise and income stagnates, more Americans are looking abroad for their retirement destination or second homes. Some 9 million Americans live abroad, according to the State Department.

Lured by a lower cost of living and more affordable real estate, places like Mexico, Costa Rica and the Philippines top the list of countries where Americans move after retirement or buy investment property, according to a survey by Wire Consulting, an international real estate consulting firm.

Making the dollar stretch

Real estate and cost of living are considerably more affordable in Mexico and Costa Rica, which is a huge draw for folks living on a fixed income.

“It’s never been easier to retire overseas—the infrastructure is better than ever, technology keeps you connected to family and friends back home, and there are a wealth of safe, welcoming, beautiful options overseas today where a retiree can live comfortably for less than $2,000 a month,” says Jennifer Stevens, executive editor of International Living.

In Playa del Carmen, Mexico, a coastal town on the Mayan Riviera known for its international tourism and pristine beaches, new condos cost less than $75,000, says Leo Garcia, team leader at Giada Real Estate in Playa del Carmen, Mexico.

“There are studio units here for as little as $53,000. You can get a two-bedroom house outside of the center for $200,000,” says Garcia. “Many of my clients are retired. They’re school teachers and flight attendants and people who want to stretch their dollar. There are also investors who live here part of the time and rent out their property when they’re not here.”

An estimated 1.5 million Americans live in Mexico, according to the State Department.

Buying these homes, however, can be tricky. Not only is it tough to find banks who will lend money to foreigners, but the terms are often less attractive than domestic rates.

“It’s almost impossible to get mortgages overseas. Many countries don’t offer them and, if they do, it’s not to foreigners. And, if you can get a loan, you’ll pay ridiculously high rates, like 12 and 15 percent. They don’t have the setup we have here,” says Alicia Cramer, a Las Vegas-based real estate investor.

Tapping your house for cash

After the housing crash, Cramer bought properties in San Diego and Las Vegas, which she now uses to buy real estate abroad. Instead of divesting her property, she’s using the equity, in the form of a home equity line of credit, or HELOC, to fund her new investments.

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“The HELOC was the best way to go if I didn’t want to sell everything. Selling everything takes time anyway; a HELOC was faster,” Cramer says. “And I don’t necessarily want to sell those properties, so this was a good solution.”

However, before you refinance your house to buy another house overseas, it’s important to consider the risks, says Danilo Kawasaki, co-founder/COO Gerber Kawasaki, a wealth and investment management firm based in Santa Monica, California.

“If the goal is to be cash-flow positive then getting a HELOC might not be the best choice,” Kawasaki says.

Because each situation is unique, it’s important to make sure you talk with your financial advisor before you take out a loan that could potentially put your existing house in jeopardy if you’re unable to make payments, Kawasaki says.

Before you jump into a HELOC for your dream home or dream investment in another country, consider these pros and cons.

Pros of getting a HELOC to buy foreign property

Quick and easy

A HELOC offers two things: capital and convenience. Borrowers can get a HELOC in as little as two weeks, depending on your lender and how quickly you can submit your paperwork. HELOCs require credit approval, and proof of income and loan-to-value ratio, or LTV. Typically, borrowers need a credit score of 620 or higher.

“The advantage is that the HELOC provides access to capital for the person who has a home in which he or she has significant home equity. And then they get this HELOC money to potentially invest in real estate,” says Shreesh Deshpande, finance and real estate chair at University of San Diego.

More cash, better terms

With HELOCs, your credit line is determined based on the equity in your home. Banks normally lend between 75 and 80 percent of the home’s value. So, if you own your home outright and it’s appraised at $300,000 then the bank might lend you 75 percent of the value, which is $225,000.

Most lenders have a maximum unsecured personal loan amount of between $40,000 and $50,000. However, there are lenders who will lend more. For example, SoFI offers $100,000 loans to people who have a minimum 680 credit score. However, the interest rate on that loan ranges from 7 to 15 percent, which is higher than most HELOCs. At Bank of America, borrowers with excellent credit scores can get HELOC rates starting at 3.48 percent.

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Personal loans often have shorter terms, which can be challenging for some borrowers. Typically, borrowers must repay the loan in one to seven years. HELOC borrowers have more time to repay. They can choose among various term limits, from 10 to 25-years. The loan is split into two periods: the draw period and the repayment period.

You don’t have to sell first

If you don’t want to sell your house to buy another house, a HELOC might be a good option.

There are many reasons why homeowners would want to hang on to their home, says Deshpande. In this instance, a HELOC could be a good alternative to selling.

“A lot of times the scenario is that somebody is planning to retire six years from now, but they still need to live in their existing property for six years, so they keep their house while buying a house in a foreign country,” says Deshpande.

“The other thing is that people want to have one foot in the U.S. and one foot abroad. A lot of the rational has to do with staying close to their family. They have children and grandchildren in the U.S. so they don’t want to completely move.”

Advantages over cashing in stocks and bonds

Home buyers can also cash in stocks and bonds. However, there may be tax implications, and this will limit your access to cash down the road.

Assess how much your investments are currently returning compared with the interest on a HELOC. You’ll also want to find out what the costs associated with cashing in your stocks and bonds are, says Bill Rayman, vice president of mortgage lending at Guaranteed Rate.

“If you have a Vanguard fund earning 9 percent and the HELOC interest rate is 4 or 5 percent, I’d rather get the HELOC and continue earning 9 percent with my Vanguard account,” Rayman says. “Plus, there could be transaction costs, there could be capital gains. It would erode all the money they’d be making on those investment accounts.”

It’s also important to be diversified, says Rayman. By using your stocks and bonds to buy more real estate, you’ll be highly concentrated in one asset class.

Cons of getting a HELOC to buy foreign property

Risk of foreclosure

HELOCs can be dicey because your home is the collateral. This means if you’re unable to make payments the bank can take possession of the property.

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“The bottom line is that if someone takes out a HELOC to buy an investment property abroad or wherever else, the person has increased their leverage or the amount of debt they have. So it’s definitely not reducing risk, it’s increasing risk,” says Deshpande.

Rates are adjustable

Traditionally, HELOCs are variable rate loans. However, there are hybrid options that allow borrowers pay a fixed rate on a portion of the credit line and an adjustable rate on the remainder. Be sure to ask your lender what they offer and what their HELOC rules are.

Chase, for example, has a fixed-rate HELOC option which allows borrowers to switch from adjustable rates to a fixed rate during the draw period on loans of more than $1,000.

“The downside of a HELOC is that the rate can change over time. After 10 years the loan will be fully amortized and people get stuck with them. It’s a riskier loan, but usually easy to get,” says Rayman.

You can’t deduct the interest paid

One advantage of HELOCs used to be the tax breaks for homeowners. That’s not the case anymore. The Tax Cuts and Jobs Act of 2017 eliminated the ability to deduct the interest borrowers paid on HELOCs, unless they used the funds to buy, build or substantially improve their home.

“The new tax laws eliminated a big incentive to get a HELOC: the deduction,” says Kawasaki. “This makes HELOCs a lot less attractive than they used to be.”

Experts agree that paying for your home abroad is just one part of the equation, buyers should also get sound advice from people who know the country, region and even neighborhood.

“I have property in Brazil that I inherited from my mother and it definitely helps that I know the country. I would recommend that anyone who wants to invest in foreign real estate should do their homework. Go out there, book some Airbnbs, talk to experts in the area,” Kawasaki says.

Americans who live abroad should also enroll in the Smart Traveler Enrollment Program, or STEP, says a spokesperson for the State Department.

“STEP is a good way for Americans to find out what’s going on in the country their living in, about any safety concerns and other information,” the spokesperson says.

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