Mention creative financing to most mortgage lenders,and you are likely to get a blank stare. As the mortgage markets have becomestandardized and the number of institutions holding their loans in theirown portfolio has decreased to a paltry few, there is less and less variationamong institutions each year.
Most mortgage products among lenders are almostcommodities today, with price remaining as the only difference between products.Despite this trend, a few exciting portfolio loan programs are out there-especiallyfor the affluent home buyer.
When a home buyer buys a home for less than $400,000,they can use private mortgage insurance to make a down payment of less than20%. Most mortgage insurance companies, however, will not cover loan amountshigher than $400,000. Some lenders provide the solution for borrowers ofhigher amounts. At Emigrant Mortgage in Darien, Connecticut, borrowers whowish to finance up to 90% of the purchase price a homes up to $1,000,000may have an alternative. For a slightly higher interest rate, borrowerscan make a down payment as little as 10% on a $1,000,000 purchase and keeptheir assets in other investments if they choose. No additional assets arerequired to be encumbered, and high-income borrowers can maximize tax advantagesfrom the mortgage interest deduction.
Not many lenders are sophisticated enough to considercross-collateralization as an alternative, but for some lenders – such asEmigrant Mortgage – it is the cornerstone of creative financing and in manycases a real deal saver. By encumbering more than one property, the overallequity position of a loan is enhanced, and in many cases will enable theunderwriters to approve a loan that may otherwise be considered too risky.
Cross-collateralization is also a great tool forsomeone that has found a house to buy before selling their current residence.Usually, such borrowers would have to wait for their house to be sold, andpossibly accept a lower purchase price than they should in order to sellquickly. At Emigrant, for example, borrowers can use the equity as a downpayment on the new house. Then, when the old house is sold, part or allof the proceeds are used to pay down the new mortgage by a previously agreed-uponamount. This option compares favorably with what is called bridge financing,whereby a borrower gets a new first mortgage loan on their new home alongwith a bridge loan covering both properties until the first home is sold.Bridge loans carry high interest rates and additional closing costs.
Custom-designed mortgages can also help meet theneeds of high-income borrowers. For example, borrowers who seek to hedgetheir bets on interest rates can lock in a low fixed rate for part of theirmortgage and keep part of their mortgage under an adjustable rate program.The result is two mortgages-both fixed and adjustable-wrapped neatly intoa single hybrid loan.
This type of financing allows greater flexibilityto put cash to other uses, including anything from landscaping and furnishings,college educations or other investments. Three-tiered mortgages are alsopossible as well, in which most any combination from 30 and 15 year fixedto 1 year adjustables, 3/1, 5/1 and 7/1 adjustables may be substituted withdollar amounts varying according to the borrower’s goals. This unique loanis achieved as a result of the savings institution’s ability to retain theloans in its own portfolio as opposed to structuring them to be sold inthe secondary mortgage market.
Wealthy individuals with stock portfolios are facedwith a unique dilemma. In many cases, a consumer will accumulate a strongnet worth through prudent investments in the stock market. When it comestime to purchase a home, the buyer may be forced to liquidate equities inorder to make the required down payment. Realizing a profit on the stockswill trigger capital gains taxes. In addition, the stock investment maybe in the middle of a profitable move upward, liquidation during this upwardmovement may result in the loss of the full benefit of the stock investment’sappreciation..
To delay tax payments and avoid missing out onfuture stock profits, some equity firms offer mortgage programs where ahome buyer can use the equity in their stock portfolio to serve as a downpayment on their home. The need for a down payment is eliminated. For example,a consumer buys a home for $1,000,000. Instead of cashing in $300,000 ofstocks as a down payment (which would probably require $400,000 to be cashedin to account for taxes), the borrower can set aside the $300,000 as collateralfor a mortgage loan of $1,000,000. The borrowers get 100% financing on theirhome-with the higher interest payments that brings-but they save on capitalgains taxes and preserve future profits.
While a stock collateralized 100% financing programmeets some goals, it usually comes with a higher price tag. In a recentreview of rates on this program, programs such as those offered by MerrillLynch offered mortgage rates on adjustable rate mortgages in the 7% to 8%range. In comparison, portfolio lenders offering pure mortgage finance optionssuch as Emigrant Mortgage were still able to offer cross-collateralizedproperty loans at rates between 4.5% to 5.5%. Of course, the securitiesfirm’s primary goal is to keep a client’s money investedin equities with the firm.
While many portfolio lenders still offer uniqueproducts in the New England market, very few can handle the larger loansof higher-income borrowers. In order for these consumers to take advantageof these programs, they need to seek out the lenders that specialize inhigher-end mortgage loans.
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