The title says it all but here are some financial specifics:
Wifey and I have around 80k in cash for a downpayment and we’d like to buy a small apartment for something around 200-300k USD.
As far as collateral. We have maybe 150k in 401ks, 50k in an IRA and 150k in equity in a house worth 500k.
Our current liabilities are our mortgage and one car in my wife’s name with about 30K left to pay on it. No other debts other than credit cards which are paid in full every month.
Is the best way to do this to get a mortgage in France with a french bank? And opening an account with them?
Or should we get a generic loan somehow backed up by one or more of the assets listed above? If so, can it use only one asset, or all assets as collateral?
Our goal is to minimize the loan’s interest rate, mainly. In theory, we have enough assets to make this low risk for a bank. In practice, we don’t live or work or own any collateral in France.
I think you really need to contact a lender in France and start the discussion with them and let them guide you. Presumably they have dealt with this before and know the ins-and-outs of it all.
If you are American, it could prove difficult if not impossible to get a French bank account even if you have a residence permit in France. This is a side-effect of the attempt by the US to tax non-resident citizens. Most foreign banks are unwilling to deal with the added paperwork.
Obviously not the question you asked but can you afford a second home, in France or even your own home country? Because my 401(k) is with Fidelity and they advise that at 65 you should have at least eight times your annual income in your retirement accounts; your investments seem kind of light. Or do you expect to receive pensions (or an inheritance) in addition to what you’ve mentioned?
Ah yes, that’s a good point. The reason is I didn’t start contributing to my 401k until 10 years ago and it’s a bit light. Luckily, my wife and I both work in the tech industry and she just got a big raise after switching jobs so we’re saving a ton of money every month. #blessed#thegreatrenegotiation
Obviously, the economy could crater tomorrow and one of us could lose their job, but even if that happened, we’d still have enough to pay that extra mortgage without having to rent it.
To be honest, I don’t see what I would talk to a financial advisor about. It’s not like we’re dumping our excess earnings in crypto and he needs to shake us out of it, right? Buying real estate is not something that I think could be considered a risky investment
So, getting back to the topic at hand, It looks like the ideal way to go will be to contact banks in France and enquire about their requirements, so I will be doing that and seeing how much downpayment is needed, what documents and what interest rates we can expect.
General though - regardless of market, interest rates seem poised to rise, as is inflation. Perhaps the best tack is to pay off as much as you can. This also guarantees the difference in exchange rates may not matter as much either. (I guess that depends on where you think the Euro-Dollar ratio is going?)
But - you barely have enough for that $200,000 property; a current mortgage for $350K and no savings after purchase seems a little foolhardy to me, as does committing a substantial chunk of ongoing income instead, but I’m financially conservative. You can rent a lot of villa for a lot of months of vacation for that much, without the hassles of mortgage, insurance, property taxes, maintenance, and security for an uninhabited building (What do those figure into your financial calculations?). Plus, the ease of having to change your mind, or being blocked from your property for a few years due to some random issue like a pandemic outbreak. Plus, I assume you’ve looked into the visa requirements to live long term in France (or the EU) if not citizens? Google “Marseille villa rentals…”
Where are you planning? A city might work well, and be convenient, especially near Paris or some other main hub where you can get back and forth to the USA without a lot of hassle. Plus I have read stories about expats (usually British) who tried to do the I-want-to-run-a-bed-and-breakfast thing in small town France only to find the locals incredibly insular and hostile to outsiders. You can be there 20 years, you’re still an outsider.
As mentioned, getting a bank account as an American citizen in Europe is an iffy proposition. America, like Eritrea and no other country, taxes citizen who no longer reside in the country. Unlike Eritrea they don’t threaten the rest of the family, just you and your spouse. As I understand, banks may be reluctant to do business with the spouse of an American also. Basically, if in the opinion of the USA they fail the tax reporting and other regulations, they get penalized a massive amount - then get to pay their expensive lawyers to argue whether the fines are justified and maybe get their money back a few years down the road.
I’m currently also in the market for a second home in France, but I’ve decided to easiest way to do this is raising a loan with my existing UK mortgage provider against the equity in my UK primary residence.
If you do a cash-out refi on your house in the US, you’ll be assessed a higher interest rate than if you were doing a refi without taking any cash out. You also need to maintain 20% equity to avoid having to pay PMI; since you currently have $150K in equity, that means you’d really only want to take $50K at most out of your house.
Put that together with your $80K in cash, and you have a $130K downpayment on your apartment in France.
As for how to finance the remainder of your $200K-$300K purchase price, that’s somewhat of a challenge. You likely won’t be able to find a US-based bank that will offer you a mortgage, since they’ll have a hassle on their hands dealing with a piece of overseas real estate if you default on the loan.
In the end, you’ll likely have to see if you can get a bank in France to lend you the money, and that may be a problem if you don’t have a permanent address in France.
Four years ago my wife and I bought some property in Japan, and we had the above problems: couldn’t get a mortgage from a US bank or a Japanese bank. In the end we put up the entire cost via a combination of cash on hand plus a cash-out refi on our first home. As described above, this bumped up the interest rate on our first-home mortgage, but as luck would have it, interest rates crashed in 2020 and we were able to refi again, this time to a rate that was even lower than what we had in the first place.
Our situation was manageable because we had a lot of equity in our house, and a lot of savings/investments other than the cash we used for the purchase; the property we bought was equivalent to about ten percent of our net worth at the time. Based on your description, your net worth is currently about $430K, so the purchase you’re contemplating is about 47-70% of your net worth. That seems like quite a reach to me; it’s not a purchase I’d be comfortable with. YMMV.
My father, whose mortgage was paid up at the time, used his home as collateral to buy an apartment in Brittany. Ten years later he sold it at a loss.
More recently, a cousin raised cash in the UK to buy an apartment in Paris. I don’t know the detail but I think he/they used a combination of re-fi, personal loan and quite probably credit cards for finance. AFAIK, they still own it and let it out as an expensive AirB&B.
I concur with everythin @md-2000 has written. And I doubt any French (or European) bank in general will give credit to a US-citizen. The risks for them are enormous, because the US imposes penalties and sanctions that are punitive even for big banks, often seem irrational and make lots of lawyers happy: the IRS just has to claim that they suspect that the bank in question might have been less vigilant than they expect concerning some taxes you might have had to pay in the USA and all hell breaks loose. The banks I have relations with (Germany, Belgium and Spain) regularly ask me if I have anything at all to do with the USA, any connection whatsoever. Should I ever answer yes, they will cut any relationship with me. Should I ever lie, they will make my life hell.
Renting is a very good alternative.
Financing a flat in Paris with credit card debt is the strangest thing I have read today.
Any investment obviously carries a risk, even property, particularly as holiday homes often aren’t as well maintained as they could be. I made a loss on my holiday home in Italy - but of course, it’s still bricks and mortar so the loss was bearable.
The French property market right now is actually very buoyant, with country properties up 6.5% in value on average in the last year. Of course, the property market in the UK is even hotter, which is why not many of us could even consider a second home here even if we wanted to, but are eyeing up our growing equities with a fair amount of greed.
Even without considering the financing mechanism(s), I have another practical consideration that comes to mind: maintenance and improvement.
Depending on where/what you’re looking at, places like France have no end of beautiful, charming, multi-hundreds-of-years-old homes that can quickly become money pits.
And tradespeople (some might say the service industry, generally) don’t necessarily function the way US Americans are used to.
And then there’s oversight – either on required maintenance or desired improvements. Difficult to do remotely.
Maybe you could put everything in the hands of a property manager, but even then – do they require X amount of dollars to hold in reserve for maintenance, repairs, and other expenses, and how much does their fee add to your cost of ownership ?
A brand new condominium in a nice urban area might be an entirely different proposition from something old and charming, but then you may have other costs of ownership to think about.
To be fair, the OP did mentioned apartment, so I’m imagining something that likely comes with a service charge for maintenance, which might lesson the burden somewhat.
. Should I ever answer yes, they will cut any relationship with me. Should I ever lie, they will make my life hell.