You are about to buy a home in Israel. As you prepare for that amazing feeling of owning in Eretz Yisroel, you should also prepare for its unique forms of red tape and bureaucracy. There are numerous issues one must address that are different from the process in the U.S., including title, investor tax and others. Financing is very different when working with Israeli Institutions and U.S. buyers should be aware of the different products and guidelines.
In the U.S. we are accustomed to a very straightforward mortgage product. Either we get a fixed or an adjustable loan. Once that choice is made, it is either a 15- or 30-year fixed, or a 5-,7- or 10-year adjustable. Certainly there are other products available for borrowers in more unusual situations, but most people will likely obtain one of these mortgages.
However, when trying to finance in Israel, the list of options is going to appear very different. Although a 30-year fixed rate is available, it must be paid in shekels, subjecting the U.S. buyer to possible currency risks. Furthermore, the maximum loan to value (ltv) permissible for non-Israelis is 50 percent. If you want to obtain a lower rate, you could secure a hybrid mortgage, which combines both a fixed and an adjustable component. Furthermore, in exchange for an even lower interest rate, you could have a loan that is tied to the Consumer Price Index (Madad). However, to obtain this lower rate, you risk a possible increase in the principal amount due if the Index increases. Finally, while in the U.S. there are no prepayment penalties on residential loans, loans in Israel typically do have such fees.
There may be an alternative. By using your primary residence in America as the collateral for your loan, you can use the equity in your home for either a cash-out refinance or a Home Equity Line of Credit (HELOC). A cash-out refinance is where you borrow more than you presently owe, refinancing your current loan and increasing the total loan amount. The increase will be the amount of funds you will need for the purchase in Israel. Rather than deal with the Israeli institution with its complicated products and guidelines, your new mortgage on your U.S. home will provide the funds you need. In deciding between a fixed and adjustable rate, you may want to consider your plans regarding retaining the U.S. home. If all your children have made aliyah and you plan to sell the house in the next few years, an adjustable loan, with a lower rate, might make more sense than the higher, longer-term fixed rate.
Alternatively, you can obtain a HELOC and use those funds for your purchase. You would likely prefer this route if you have a low rate on your first mortgage and don’t want to refinance that portion of the loan with a higher rate. The HELOC will provide the funds you need for the purchase. In deciding between the cash-out refinance and the HELOC you will have to balance the total payments on the one new loan versus the blended payments combining the old loan with the HELOC. Obviously, the HELOC includes the risk that the rate could move higher since it is subject to change at any time. There will likely be other considerations as well as you explore this option.
Finally, one thing to consider is that some requirements by your bank, while burdensome, actually provide protections for you. Since the property serves as collateral for the bank’s loan, the bank will want to insure the quality of the construction of the property as well as clean title. Since the US bank has no interest in the property in Israel, you won’t be required to inspect the property or examine whether there are any existing liens on the property. However, for your protection there certainly are precautions you should take prior to purchasing the property. Using a full-service realtor will help insure you address those concerns that the bank might otherwise have addressed.
In summary, securing a mortgage in the U.S. has benefits over obtaining a mortgage in Israel.
The terms on a primary residence in the U.S. are likely more attractive than those from an Israeli lender. The borrower will likely get more years of protection, a lower fixed rate and other better terms.
There may be tax benefits with the U.S. loan that may not be available on the Israel mortgage. (Ask your tax advisor.)
It’s likely easier dealing with a local U.S. bank than working with a representative at a bank in Israel.
So, if you have no option, contact an Israeli bank or a mortgage broker in Israel. However, if you have equity in your U.S.home, be sure to explore that option as well. You will have enough issues to address as you complete your transaction. A little less red tape might be welcome.
David Siegel is a Home Lending Specialist with Citibank in its Englewood office. Siegel can be reached at [email protected] or 201-419-1330. Call for mortgage rates and compare before you buy.
By David Siegel