r2i forum

I couldn't find information on this elsewhere, so ..

I've bought a property ~40L in Pune on loan via HDFC (10.5% as of now). I'm wondering if it is possible to refinance/prepay this loan by applying for a mortgage in US. Has someone tried doing this before ? I'm wondering what hurdles may appear if I go about doing it. I'm speculating that since US interest rates are low (~7%), I might still gain even if HDFC asks for 2% refinancing fee.

Further, is it possible to avoid refinancing fees somehow? e.g., take some other kind of loan and pay off HDFC loan without telling it.

Another related tax question - is it possible to obtain tax deductions in US for interest paid on loans in India?

We recently paid off our HDFC home loan. I don't think we had any penalties.

IIRC, I read somewhere taht one way to get around paying a huge penalty if there is one is to not pay 100% at one go. Rather pay 95% and then 5%, so the penalty applies only to the 5%.

But it'll depend on what kind of contract you have signed. Check with the loan officer. They are pretty good about replying by email.

I think I missed a few details.

There is NO prepayment penalty with HDFC. It is just that I don't have money to pay off the loan in near future and therefore have to keep loan running for sometime.

Therefore, my goal is to reduce the interest I'm going to pay on the loan. So, I'm trying to refinance the indian loan by an US loan with lesser interest rate.

This looks like a rupee-carry trade :) to me

Thanks Going_nowhere.

I will really appreciate if you could provide a link to some IRS document regarding this.

#1 - I'm looking for similar information. I am trying to find out whether I can get a loan in the US to finance a property purchase in India. As you suggested, mortgage rates here are under 7 % and home loan rates in India are at 10 % so it would be advantageous to take a loan here.

If you find information on this, please post for others benefit, I'll do the same.

For small amounts.. one thing I have heard is people taking cash advances/ balance transfers on credit cards for low interest rates (1.99 - 4.5% sometimes) and use that one form of financing. Only problem here is that you will not get much money this way and will wind up maxing out your credit card.

House mortgage deduction is allowed for a qualified home.

A qualified home is your first or second home. There is no restriction that second home has to be in USA. It can be in India.

http://www.irs.gov/publications/p936/ar02.html

However for mortgage interest to be deductible, it has to be secured by the lien on the home.

I very highly doubt that any USA bank will extend you a mortgage on a foreign home, however you can check with the bank or a mortgage broker if you want.

Now if the loan is extended by Indian bank, the interest is technically deductible, but another regulation comes into play which requires you to withold taxes on the interest you are paying if you are paying to a foreign recepient. Now which bank in India is going to give you a house loan agreeing to have taxes for US govt witheld? None.

Hence if you want to fund your house in India with a loan from USA, you can either take nonsecured nondeductible loan. Because it is nonsecured, the interest rate will be high. Your other alternative is to take a second mortgage, HELOC etc against your current home if you have equity and you can use that loan for any purpose including to pay off house loan in India.

There is a thread on this issue, I believe as this was discussed earlier.

I did some research some time back. I understand that NRI brances offer loans in US against properties in India.

However, you will not see any advantage in rates (Citibank USA rates were actually 1% higher than the rates of Citibank India). ICICI quoted 14% for fixed rate and 12% for floating which is close to what they offer to residents.

The only minor advantage is that if you do not have a credit history in India, you can still get a loan.

You can get a HELOC (or another loan) in US and repatriate that money to buy a home in India (however, since you cannot bring that money from selling house back to US for 10 years - you will have to pay back HELOC mostly from your US income)

I understand that a home in India has same tax consequences as a home in US. In short three cases are possible:

Primary Residence: Your usual deductions that apply to US-based primary residence apply. You can deduct Indian property taxes (see IRC 164(a)(1)(3) ) and mortgage expense (see IRC 163(h)(4)(A)(i)(I) and (II) ) if you itemize your US tax return.

If you sell you can exclude upto $500k of gains if you are MFJ (you must have used the house as PR for 2 years out of last 5).

Rental Property: If you are not living but only renting it to others - you can take deductions on Schedule E for interest, insurance, repairs, expenses, maintenance etc. If after all these deduction you make a loss on
the rental - you can offset upto 25k of your income from other sources against such a loss.

Combination of Renting and Living: If you rent for more than 2 weeks in a year then you have to pro-rate between the above two cases. If its less than 2 weeks then you can apply the same deductions as under primary residence. (as long as you dont already own 2 homes somewhere else)

You will also pay Estate taxes and Gift taxes on transfer of property.

To answer #9, if you reside in US then you have to withhold 30% of the interest you are paying which is practically impossible but if you live in India you do not have to do this.