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| Best Practices: Real Estate |
Mortgaging Futures
Kris Frieswick
12/01/2005
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Growing up in a Pennsylvania coal-mining town as the child of
lower-middle-class parents, George Matz learned early that life can be tough and
that security is often elusive. When he was 19, Matz’s father died, and he was
forced to put himself through college. Today, as a 55-year-old private investor
and professional board member for not-for-profit companies, Matz is happily
investing the fruits of his former career as an executive in the high-tech
industry. One might expect someone with his background and financial wherewithal
to own his home outright, because the ability to buy a house with cash is often
seen as the ultimate security blanket by those who have triumphed over
adversity.
| “I don’t want to put too much thinking into my house. Emotionally,
I want my home minimally exposed to debt.” |
Yet Matz, who bought his Pinellas Park, Fla., home in 2000, has
chosen to fund part of the house with debt. “I could have written a check for
the house,” he says, “but I feel comfortable with the mortgage.” He financed 70
percent of the purchase price with an interest-only, seven-year, Libor-pegged
loan that charges about 3 percent interest. He then used the money he would have
otherwise spent on the home and invested it in tax-free municipal bonds that
paid between 5 and 6 percent. “I am using other people’s money to make money,”
he says.
A mortgage, even for those who, like Matz, can afford to pay cash
for a multimillion dollar home, can be a winning investment technique in the
current economic climate. Many people who could afford to pay cash use mortgages
to free up investment income.
 Boutique and concierge mortgage divisions
offering super-jumbo mortgages—which generally start at approximately $650,000
and may go higher than $5 million—are springing up at financial firms across the
country to service this demand. Bank of America recently announced plans to
increase its jumbo mortgage offerings, and small boutiques that have long
functioned as financial advisors or as stock brokerages are getting into the
game. Mellon Private Wealth Management Group has been servicing the mortgage
needs of its affluent clients since the mid-1980s. It lays claim to developing
the interest-only loan specifically to serve the needs of this demographic,
which, due to variations in cash flow (from bonuses, dividend payments and
similar income streams), prefers to make principal payments at irregular
intervals.
TOP VIEW
Although private investors can afford to pay cash for their homes, some find
advantages in securing super-jumbo mortgages. Designed specifically for those
investing in top-tier housing, these loans provide payment flexibility and tax
advantages. They also free up cash for other investments and deliver a hedge
against inflation. But these loans often carry slightly higher interest rates
than standard mortgages and can complicate estate planning strategies. |
According to Mark Langille, vice president of mortgage lending for
Mellon Private Wealth Management, homeowners generally cite four reasons why
someone who could pay cash for a home would opt for a mortgage. The first is the
desire to retain the mortgage interest deduction, one of the few deductions
still available to wealthy people. Individuals can deduct the interest on up to
$1 million of mortgage debt as long as it is used for acquiring, developing or
substantially improving a property. Individuals can also deduct the interest on
up to $100,000 of home equity debt. Adjustable rate mortgages are especially
popular for the super-jumbo set because even a slightly lower interest rate can
result in big cash savings on a $1 million loan over a short period of
time.
Some investors mortgage their homes because they want to maintain
liquidity for other investments that require cash—and the flexibility to move
quickly on those investments. Larry Lipa, cofounder of Corvus International, a
real estate development company based in Birmingham, Mich., often comes across
deals that must be sealed quickly in order to get the best terms—and that means
having large sums of cash available. This is why he has mortgaged both his
primary and secondary homes in Michigan, even though he could afford to pay cash
for both. “Sometimes an opportunity comes along that you only have a couple of
days to grab,” Lipa says, “and you want to be able to just put the money down.”
Having cash also makes him a more attractive customer for lenders. “For every
dollar you have in your hand,” he notes, “you can borrow four
dollars.”
Mortgages can also eliminate the need for borrowers to liquidate
investments that may result in capital gains taxes. Finally, long-term mortgages
of all sizes provide a valuable hedge against inflation.
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