Today I am continuing the educational series of posts on cross border financing. It is a topic that has been shrouded in a lot of rumors and confusion, so hopefully, this series will help to solve some of that confusion. Although this is a post meant for education, it is not to be used or republished in any part, form or manner without explicit written permission from myself, Doug Jones. Enjoy the series, and feel free to comment with any questions or comments you may have.
USDollar vs. MXPeso Loans
There are a couple of basic options available when looking at financing your home in Mexico. You will have the option of a peso (MXP) based loan, or a US Dollar (USD) based loan. The USD loan options will be less expensive and will generally be your best option. There are some circumstances of when a MXP loan would be a consideration.
1. If your FICO/Beacon credit scores are low, consider a MXP loan.
2. If you property is located in a remote “non-resort” area in Mexico, consider a MXP loan.
3. If your income is being earned in Mexico, consider a MXP loan
MXPeso Based Loans
There are advantages to both, so you will want to look at both to discover which option is best for you. A peso-based loan is generally funded by a bank or investor located in Mexico. The monthly payment is generally a fixed amount in pesos. This payment is set on the day of closing based on the current MXP to USD exchange rate. For example, if you are going to borrow money and your payment would be equivalent to $2,500 USD/month, your payment would be converted to pesos on the day of closing. If the exchange rate is 11 MXP to the USD, your actual payment would be $27,500 MXP per month. If you have a fixed interest rate, this payment amount would never change. It will always be $27,500 MXP until you pay off your loan. What would change, however, would be the amount of USDollars it would take for you to make this payment every month. The peso has historically devalued against the USDollar at a rate of approximately 6% per year. As the exchange rate changes, your actual cost will change according to the current monthly exchange rate. If in the same example, your payment is $27,500 MXP per month, but the exchange rate is now 12 MXP (instead of 11 when you started your loan), it will now cost you only $2,291.67 vs. $2,500 to make the same fixed monthly payment in pesos, or $208.33 less in US Dollars. This is because it takes fewer USDollars to purchase the same amount of pesos when you are getting 12 pesos to the Dollar versus 11 pesos to the Dollar. This savings of $208.33 is a significant difference in your monthly payment, and as the peso would continue to devalue against the USDollar, your effective monthly payment would continue to decrease as well.
Generally the way you would make your payment on this type of loan would be to set up a US checking account with the lender. You then deposit your USDollars into this account, and the lender takes out the monthly payment automatically every month, based on the current exchange rate when the payment is taken out. This is convenient, and you don’t have to wire money into a Mexico account every month, which saves you a lot of money. Since this loan is being funded from an investor located in Mexico, the devaluation of the peso DOES affect them. They have already loaned out their money, and they are getting a fixed monthly payment ($27,500 MXP), but these pesos are worth less and less every month as the peso devalues against the USDollar. Therefore, you will be paying a higher interest rate to compensate for this annual devaluation as was explained previously. A rate of 4-6% higher for a MXP based loan over a USD based loan is what you can expect to pay to compensate for the annual devaluation of pesos.
All of this, of course, depends on the MXP continuing to devalue against the US Dollar. Although there are no guarantees this will continue to happen, there are experts a whole lot smarter than I am who think the basic dynamics between the US and Mexican economies are unlikely to change significantly over the coming years. As of this writing, the USDollar has been at historically weak levels. This means foreign currencies are strong against the USD. During this period of a weak USD, the Canadian Dollar has become very healthy against the USD, and the peso has stayed at basically the same exchange rate. In other words, even during an unusual weakness of the USD, the peso hasn’t gained any ground against the USD (while other currencies have), so in essence, your effective loan payment in USDollars hasn’t decreased, and it hasn’t increased either. It has remained about the same. There is strong pressure from the international markets for the United States to strengthen the USD to more normal levels, which will likely see the MXP once again devalue against the USD. This will have a net result of costing you fewer USDollars to make your fixed peso-based loan payment. It will be back to business as usual. MXPeso loans generally have a shorter maximum loan term – usually no longer than 20 years. MXPeso loans require life insurance, so the maximum age a borrower can be AT CLOSING, is 64 years and 11 months.
-Doug Jones
918-398-9588
Doug@MortgagesInMexico.com
http://MortgagesInMexico.com
©Doug Jones 2010
