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| Best Practices: Real Estate |
Mortgaging Futures
Kris Frieswick
12/01/2005
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Even those who see the
financial benefits of mortgages acknowledge a break point at which they will
decide to pay cash. For Matz, Lipa and Avital, that point is when the mortgage
rates creep up into the high 6 percent or low 7 percent range. The consensus is
that in this event, cash may become the more attractive option because market
returns fail to outperform the cost of the loans. Moreover, the mortgage
interest deduction does not apply to the purchases of third or subsequent homes,
so for the affluent buyers of multiple homes, it may be smarter to pay cash for
these additional properties, unless they are prepared to arbitrage the money
they would have spent on each home.
For many people this type of arbitrage is
just too much trouble. “For the ultra-wealthy, avoiding a monthly payment is
their modus operandi,” Hendrix explains. “These people would generally rather
pay cash or find some alternative source of financing.”
Yet, even with
interest rates creeping up and the ominous whispers of bursting bubbles growing
louder, the jumbo mortgage financial strategy remains, for many, both viable and
enticing. According to Ron Chicaferro, executive vice president of Thornburg
Mortgage, a Santa Fe, N.M., lender that focuses on the super-jumbo market, about
half of those who can pay cash for a luxury home will decide to take that route.
“I really haven’t seen much of a change in those percentages over time,” he
adds. “However, if you define the market based on the cost of the properties,
there are a lot more people financing higher-end homes than ever before. People
are making a lot more money than they have in the past, and there are more
people becoming higher-end borrowers as a result.”
Kris Frieswick is a Boston-based business and finance writer.
Illustrations by Edwin Fotheringham.
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