Mortgages in Mexico: Everything You Need To Know!

Video Transcript - (with Alex & Chris)

Alex Koper:

So today we're talking about this construct or this idea that why should we do things differently? Why not just do it the way you always have and do it? Meaning foreigners purchasing property in Mexico, sort of, they figure out all these sort of complex ways in the US to leverage other assets and bring the cash across the border and quote, "pay cash." Why is that changing and why should it change? Right? Why should somebody watching this that's-

Alex Koper:

... Planning on taking out a HELOC or a facility against a stock account or refinancing their home that is the roof over their head. Why should they not do that? Why should they work with us instead?

Chris Childress:

Well, there's many, many different reasons. So first of all, let's start with leveraging the asset that you're actually looking to acquire or use as the collateral for that financing. A lot of people will say, "Hey, let's do a home equity line of credit in the United States." Which is a fast and easy access to liquidity you have there, or even to leverage a financial instrument or an investment account that they've got in the US. But at the end of the day, they're not leveraging the asset that they're actually looking to finance. So what they're doing is liquidating something that's easy to access, maybe not quite as stable and secure as a long-term fixed rate mortgage might be in order to purchase the real estate in Mexico. What MoXi introduces is an option to do a long-term fixed rate mortgage for the US citizen using the real estate asset in Mexico as that collateral. So you're actually pledging the real estate in Mexico as the collateral versus something that's easy to access in the United States.

Also, with that, you're going to enter yourself into a fixed rate environment, so you have long-term, predictable payments, know exactly what you're working with versus something like a HELOC or home equity line of credit, of course, which will have more of an adjustable rate mortgage that can move based on the markets can move month to month affecting your predictability and you're able to forecast.

So that's just one of many reasons to lead that direction.

Alex Koper:

What's really interesting is that I was in a conference recently and there was an example put up on the screen and it showed what the interest payment was on a HELOC with a $500,000 balance in February of 2022 versus February of 2024, and it was like three and a half times higher, right?

Chris Childress:

Sure.

Alex Koper:

That's a real issue when you're thinking about adjustable rate credit lines and also versus a fixed interest rate, a payment you know can afford in the currency in which you earn your income. Really, really good point. When we think about other benefits of working with MoXi versus proverbially bringing cash across the border and buying a house here in Mexico, what are some of those other benefits?

Chris Childress:

Well, when foreigners look to invest in Mexico, the appeal is there, right? They come, they see the beautiful beaches, all the excitement, the allure of being here. In a lot of instances, common sense kind of just goes out the window. You get excited about, Hey man, I've got the cash, you've got the keys. Let's do a swap right now, and they don't really think about the long-term security of that investment. By using an institutionalized lender like MoXi, obviously we have a vested interest in making sure that we do our diligence on the property. We make sure that once the transaction is closed, the borrower is buying what they agreed to buy. We as a lender, we're filing our lien against the collateral, and we've done our diligence to make sure there's a safe investment. A lot of our borrowers will come to us and even though they have the ability to pay cash and attain the property without using, leveraging, or leveraging financing with MoXi, they will use us specifically for our diligence process to make sure that when they close, they know that they've closed in a safe and secure environment that they could trust.

Alex Koper:

Yeah, that's a really good point, and I think it really showed us we were onto something at MoXi when we had people saying, "Well, I don't really need a loan. I need to buy this house, but I'm going to take one anyway because I really want you guys overseeing the collateral transfer process." And we were like, "Wow, thanks. That's a great validation to the hard work our legal and closing teams do every day."

Chris Childress:

Absolutely. You'd be surprised at some of the stuff you see out there. For example, we saw a customer who came to us who had a property that she had owned for, thought that she had owned for over a decade and had all this liquidity and was ready to just harbor some of the equity and do some fixing up on the property. And come to find out, whenever we got into the process, we got the title. It had been one of those, Hey, this is really pretty. I've got the keys, you've got the cash. Let's make a deal and we'll work out the details later. And then a decade passes. She's looking to refinance and harvest that equity and she's been on the property at all. So it took a very large portion of the equity she was trying to harvest in order to right that situation. We were fortunate that she was able to get through it and get it fixed, but you see this over and over again. You just want to make sure that you know what you're getting into and you've got a team of trusted advisors that will help you to make sure that when it's done, it's done correctly.

Alex Koper:

Such an important point. If you're watching this video and you're buying property in Mexico, even if you don't work with MoXi, please hire competent legal counsel to represent you. Real estate agents are also really excellent, most of them. However, you've got to have a competent attorney that's reviewing the deed documents. Please, please, please, please, because over don't want to end up. That sounds like there was a happy ending in that situation, but you don't want to end up 10 years from now finding out you don't actually own the house that you paid for and that you've been living in the last decade, or the underlying land underneath it actually belongs to somebody else, and they can kick you out at any time that happens. Right? Yeah, such a powerful reminder. So yeah, really appreciate that. So let's just dive in a little bit deeper. What are some of the things that, so you run the retail sales team, what are some of the things that clients like most about MoXi's product options and the service that they get from your team members?

Chris Childress:

Oh, goodness. Well, it starts out in the initial interview, the initial consultation, MoXi's got a very strict policy on transparency and making sure that we're providing all the information front. Sometimes some of the information with the increased cost of acquisition in Mexico are not the most comfortable conversations to have, but we're committed to make sure we're providing all of the information so that our buyers can make an informed decision.

Also, customers find it very beneficial that we also, we lend, so we originate and we service in US dollars, so it's easy to understand that once we close the transaction, we kind of transfer that asset in the servicing of that loan back to the United States. So customers are making their payments in US dollars in their home country. They're not trying to make cross-border payments each month, deal with conversion or exchange rates and all that kind of stuff.

So it makes it a whole lot easier. Also, MoXi is what we call a [inaudible 00:07:22] servicer. I hope I pronounced that correctly. But essentially we are set up in the United States and again, servicing US dollars, handle the escrow payments on behalf of the borrower for taxes and insurance and all that. And then we also provide what's called a 1098 IAT statement, which is the vehicle necessary to use to potentially deduct some of that interest paid into your mortgage on your US taxes if it fits in the tax situation for that particular borrower. And that is a huge benefit for people who are classifying their homes as either primary residence or second home and could give them that deductibility there.

Alex Koper:

Ether or as investment property, and you're declaring the income on your schedule E, theoretically you should check with your CPAs or tax advisor. We don't give tax advice, but theoretically you could deduct the mortgage interest on that asset, right?

Chris Childress:

That's right.

Alex Koper:

Again, it's the rental income. Yeah.

Chris Childress:

That's right. And we're providing the vehicle to do that through that 1098 statement there.

Alex Koper:

Yeah, really important point.

Chris Childress:

A big point.

Alex Koper:

Yeah, that's really cool.

Chris Childress:

In addition, we've talked about a moment ago, the predictability. These are not adjustable rate mortgages with prepayment penalties, or balloon notes, or any exotic features like that that kind of force you into an uncomfortable situation. We offer long-term fixed rate mortgages specifically for US citizens, so they know when they sign up, whether it's a 20, 25 or 30-year fixed rate mortgage, what their payments are going to be for that time so they can build their business around. If they use them for vacation rentals, they can budget around it and things along those lines. So an important detail

Alex Koper:

It's kind of a plain vanilla loan.

Chris Childress:

That's right.

Alex Koper:

I think in a foreign country, that's what our clients appreciate a lot, right?

Chris Childress:

Absolutely. We believe that owning real estate in Mexico should be exotic, not the instrument you use to do so to finance it.

Alex Koper:

Shouldn't have an exotic mortgage, should have an exotic homeownership experience.

Chris Childress:

That's right. That's exactly right.

Alex Koper:

All right. Awesome. That's really cool. So going back to your point just a minute ago about servicing and subservicing, I was talking to a client the other day, they said that they were having... It's actually not a MoXi client. I was talking to a foreign owner of a house, a very, very nice house here in Los Cabos, said that they couldn't make their property tax payment on the property tax assessor or tax collector's website unless the billing address for the credit card was in Mexico. So it's basically very difficult as a foreigner for you to pay your property taxes or your fideicomiso renewal if you're not here, right. Go wait in line or you have a credit card of the Mexican billing address. So how does MoXi and our servicing program work with respect to that?

Chris Childress:

Absolutely. That is a great question. So once you close the loan with MoXi, we're along with you for the life of that loan. So we've got our servicing entity in the United States, so obviously we collect our payments and manage the relationship with the borrower on that side. However, we do collect escrow for taxes and insurance, and then when those assessments come due, we have our boots on the ground in Mexico who are able to go down to the offices, make the payments there real time without having to navigate the complexities of what you're referring to with the US credit cards and paying the Mexican bills and that kind of stuff.

In addition, the fact that we've got people on the ground in the locations where the property is located, Mexico often offers discounts by paying early or even on time for your taxes. So MoXi is always going to make sure that we're making those payments to try to capitalize on whatever discounts are available right there.

Alex Koper:

Good, very good point. And a critical added benefit. While we're talking about taxes and fees, I want to ask you in a minute about closing costs because that's always a big topic, but before we get there, if you could just talk to us a little bit about what are property taxes like in Los Cabos or in Mexico compared to Texas where you came from?

Chris Childress:

That's where I came from.

Alex Koper:

California, where I come from, right?

Chris Childress:

Yeah.

Alex Koper:

Talk to us a little bit about that.

Chris Childress:

Well, it's fractional. It's fractional. It may be... Closing costs are often a little bit higher at the acquisition phase in Mexico than what you would be accustomed to in the United States. For example, when we speak with borrowers, we're generally going to estimate anywhere from about 8% to 12% of the purchase price or assessed value for settlement charges. Whereas in the United States, that might be 3% to 5% on the expensive side. So there is quite a difference in the acquisition cost, but the carrying cost is where the magic comes in. For example, in Texas for a new development, we're looking anywhere from 2.5% to 3.5% of the value for your annual tax base. Whereas, here in Los Cabos, we estimate much, much less, 30 basis points. I mean, it's just literally a fraction of what it is in the United States for carrying costs.

Alex Koper:

Super round numbers like Texas 3%, here 0.3%

Chris Childress:

Roughly. Yeah.

Alex Koper:

Okay. Wow.

Chris Childress:

So a huge difference on the initial estimations of what those would look like.

Alex Koper:

So on the ongoing basis, you might have a lot of closing costs, which I'll ask you about in a minute. You might have a lot of closing costs up front, but on an ongoing basis, it's a lot lower carry costs on property tax, for example. How about hazard insurance? I know we had a presentation just yesterday from a really talented insurance agent that partners with the MoXi team a lot. How are hazard insurance premiums here versus in the US?

Chris Childress:

I think they're pretty comparable. Obviously, it's just like in the United States where hazard insurance is going to be based off the risk. So if you're in an area where you have a lot of earthquakes or hydro events and that kind of stuff, then you may have a little bit more. Maybe a little higher than your other areas that are less risk, but it's going to be comparable or less expensive for the real estate or for the insurance figure in Mexico, what I'm accustomed to seeing in the United States.

Alex Koper:

Cool. Yeah, one thing that stood out to me during that presentation was all of the things you get in a hazard insurance policy in Mexico, which is given by a regulated entity, it's relatively safe, but you get hydro-meteorological coverage included in your policy. It's not like an extra, right?

Chris Childress:

Right.

Alex Koper:

Yeah, it was cool. It just indicated to me there are a lot of much lower carry costs as far as on an ongoing basis. All right, so to get to the big question, talk to us about the upfront fees. You said 8% to 12% sometimes we see higher than that percent of the property purchase price in upfront closing costs. How does that work? How do you and your team talk to clients about that on an ongoing basis and order some ways that MoXi helps understand it and also maybe help finance it?

Chris Childress:

Yeah, yeah, that's a great question and a great caller from one of our new recent improvements to our program. I'll plug it here for us. Well, so yeah, closing costs are going to be a little more expensive than what you find in the United States, and that's because you see things here in Mexico that you don't generally see in the United States, with the exception of a couple of states and very specific sectors of the real estate market. And one of those big things is going to be what we call your ASABI tax and your transfer tax, which is basically a sales tax on the real estate itself in Mexico that's going to range anywhere from about 2% to 5% of the value of the property depending on where you are in the country.

So essentially if you've got $1 million property and you've got a 3% acquisition tax, that gets pretty healthy, and that's something that you don't generally see when financing real estate in the United States. So that's one thing to consider.

Secondly, for foreigners to invest in Mexico, there are a few steps that you have to take in order to get all the documents in order to be able to do so. For example, in Mexico we use what's called a fideicomiso, which is essentially a real estate trust, specifically designed for people for foreigners buying real estate in Mexico. In order to obtain that fideicomiso and have permission to set that up, you're required to go to the Secretary of Foreign Affairs and get a permit, for example. That's a one-time fee. You do it upfront, but essentially you have to go get that permit, and that's a cost that you wouldn't generally incur in the United States. So there are some things that are more expensive upfront.

We worked really hard to be super transparent and explain this in a user-friendly and easy to understand format. We've really got it broken down to the basics, and we have this document, we call it Mexico Real Estate 101, which is kind of a two-part document. It basically has a couple of grids in there and it says, "We are MoXi, here's what we do and here's what we charge." It's pretty easy to arrive at what MoXi can charge for the services, but then we've got a separate table in that document that has a list of all the other fees that you will likely, more than likely incur in your journey in financing real estate in Mexico. It breaks down in ranges, so we'll talk about the acquisition tax that we referred to, what the permit fee might look like, things along those lines. It gives you a breakdown of all those other fees.

So we like to spend time going through that and line by line, it is kind of a top-level early fee disclosure without getting specific to the exact property because obviously at this stage of the process, we don't know what we don't know, but we want to make sure that we arm our consumers and even our partners with a clear vision of what to expect as we move forward.

That way when we encounter these things, we're able to reference back and say, "Okay, we talked early on about this. We fall within that range." Or whatever that case is. We've done a really good job of really bringing that down to an easy understand format.

Alex Koper:

What I really appreciate about you and your team is you sort of operate, I don't know if you even say this out loud, but it seems like you operate with the mantra of we're not always going to tell you client, what you want to hear, so we're going to tell you all of the facts. We're going to lay them out for you in an easy to understand format in a document, and then we're going to spend the time to walk you through line by line what each of these things mean, and you might not like it, but if you want to buy a property in Mexico and you want to do it the right way, legally, this is what it's going to cost, and we're going to help you understand what that looks like. And I think that's a unique value proposition that at least so far in the few years I've been leading MoXi I haven't seen from anyone else. So I think that's like you guys do an awesome job with the transparency and that.

Chris Childress:

Thank you. The lifecycle to get from interest to closing in Mexico is much longer than it is in the United States, and there's a lot more involved. And of course we've talked about it's a lot more expensive or not a lot more expensive, but relatively more expensive than it is in the United States. And it's not just the amount of the total fees, but it's the time and the method which those fees are collected. And in the United States, a lot of vendors will work on contingency. They're not collecting fees up front. If it doesn't close, they don't get paid. However, here in Mexico, when we request services, for example, a title search, or an appraisal or whatever the thing might be, we're responded to with an invoice. So the customer, we kind of share that exposure as we move through. So obviously, the borrowers are making some deposits towards those costs and early on in the process, and what we learned early on is that there's two big drivers. It's obviously going to be interest rates, which we talk about, and then of course fees and that kind of stuff.

And we've found early in process, if we went through the traditional of here's all the great things, but we don't really expand all the things that are uncomfortable early in the process, they become more uncomfortable later in the process and it costs the borrower more money, more frustration as well as us on our end. We learned if we can get transparent on the front end and create the right expectations and customers feel much more comfortable on the back end, and we have a much higher likelihood of actually closing the transaction. So that's the reason we take that approach.

Alex Koper:

Really good point. And I think just from our customer feedback surveys, we hear all the time, people appreciate getting all the information in front, having a trusted person they can ask questions to along the way, working with a competent team on the things that are really foreign, all the legal and closing documentation and processes, and ultimately just being well cared for by team of professionals who take their responsibility and their fiduciary duty to their clients very seriously. And so yeah, hear that often. Okay, so big question that we get probably more than anything else besides fees, rates. Let's talk about interest rates a little bit, so I'll leave that pretty broad, but tell our viewers what you got on the interest rate.

Chris Childress:

So interest rates for MoXi loans are very similar to what you would find in US-based mortgages. And what I mean by that is that interest rates are risk-based, so they're going to be driven by credit score your skin in the game, if you will, or equity position. So amount of down payment or loan to value, we refer to it as well as the loan amount. That's really the closest tie. Now obviously, it's a little bit more risky transactions to the investor and things along those lines. So you're going to pay a bit of a premium over what you might see in the United States. Generally speaking, we're going to be about 1.5% to maybe 2% higher than your per prevailing thirty-year fiduciary mortgages in the United States when it's a different type of loan. So if you're seeing 6% and 7% rates in the United States, you might find 8% to 9% interest rates for a MoXi loan that's similar.

Alex Koper:

Yep, yep. Good point. And I think people often ask us like, "Well, gosh, what if I'm going to rent it out on Airbnb some of the time, then is the rate going to be higher if I say it's my primary residence or because I'm completely relocating or it's a second home?" How does that part work?

Chris Childress:

Sure. So investors base interest rates and base their pricing off of risk, and they're going to look at what's the likelihood of if the borrower finds themselves in a precarious situation and they've got to make an adjustment, what are they going to be the most attached to and protect the most?

Alex Koper:

What bill do I stop paying?

Chris Childress:

That's exactly right. That's exactly right. So obviously primary residence is going to be the most secure investment. That's their roof over their head. They're going to do whatever it takes to keep that intact. Second home, kind of the same thing. If it's pure investment, then you often see sometimes an adjustment. With MoXi, we don't have any price differentiation between primary residence and second home. There's a slight adjustment to the interest rate if it is purely investment. However, MoXi's got a very, let's call it liberal policy on second home. So essentially, most of our customers will purchase these homes. They intend to use them as a vacation home, which they can spend a couple of weeks per year in, and then they intend to cash blow it through Airbnb rental, vacation rental for the rest of the year.

So if the borrower intends to spend any portion of the year inside the home, whether it's a week or 10 days, then we will consider that a second home versus an investment property, which means there's no adjustment to interest rate or loan value or any of that. So that's a great opportunity for that person who's doing a hybrid, right?

Alex Koper:

Yeah.

Chris Childress:

Who can purchase their investment home and let it fund itself, I'm sorry, to purchase a vacation home and then let it fund itself through vacation rentals.

And another great benefit, if I can call it out?

Alex Koper:

Yeah.

Chris Childress:

The people who are cash flowing using for vacation rentals is the fact that we talked about the exotic features that we don't include in our mortgage. There's no prepayment penalty, there's no balloon note, and obviously our interest rates are fixed for the duration of the loan. So most of our... And here's another thing, we don't charge an adjustment or there's no adjustment in price between say, a 15-year and a 25-year. This is adjustment for a 30-year loan, but there's no difference between the 15 to 30. So most of our customers will opt for a 25-year fixed rate mortgage. There's going to be no prepayment penalties, no balloons, anything along those lines. That way they've got the lowest mandatory debt service in the months where they're using the property for themselves. Or maybe when it's an off season, they'll have a high occupancy rate, but they have full freedom to accelerate that principal balance during the harvest months, if you will, when they're really busy. Ran into cash flow and all that. It gives them a lot of flexibility, and that's something that we're proud to offer.

Alex Koper:

Nice. Yeah, that's good. Awesome. I'm trying to think of the other frequently asked questions we get. Talk a little bit about title insurance just at a high level? I do hear this on the street sometimes, like, "Oh, you don't need title insurance in Mexico." What's your perspective on that or how does your team talk to clients about that?

Chris Childress:

Well, we are obviously mortgage professionals with our experience in the United States, and generally speaking, I wouldn't purchase real estate in the United States without having a thorough title search done and obtaining a title insurance policy. And the purpose of that, obviously, to protect against anybody who could come back and stake claim to the property, whether it's a construction company who's done work on the property, maybe wasn't paid in the past, or maybe the property was conveyed without a signature that was necessary from one of the co-owners way back. Title insurance companies, essentially, they work through the title search, they review all the information, and then they make sure it's a clear delivery, and then they insure against a claim of that property.

And again, I would never purchase real estate in the United States without running through that, so why would you do it here? But it kind of goes back to what we talked about earlier about you get excited about it, there's the beach, there's the margarita, there's the sombrero, you just throw caution to the wind and like, ah, he says it's good. It must be good.

But again, we see examples of exactly what we talked about earlier in this conversation about people who thought they had purchased property, and got excited and they've just been going on for years, sometimes decades or more of owning this real estate and just to come to find out that somebody else actually had claim to that title. And that's a very scary place to be, especially when you invest your hard-earned money into that. And it's not just a financial investment, it's an emotional investment. And then you come down line, you find out it's not quite mine after all, and it's quite the process to clean that up. So it's so important to make sure you've got the things along those lines.

Alex Koper:

Yeah, totally agree. Chris, thank you so much for being here. I think we've covered some of the most frequently asked questions we get from clients about this. You and your team just do such an incredible job taking care of our customers and our real estate partners and making global ownership possible for the world. And thanks for being here and for sharing.

Chris Childress:

It's such a pleasure. So very exciting to be a part of changing the world for foreigners investing in New Mexico.