For a Lower Rate, Let Cash Do the Talking

Original Post Date: October 25, 2012

By: Annamaria Andriotis

When Aaron Schindler’s offer was accepted on a two-bedroom, two-bathroom co-op in New York’s Upper West Side, he figured he’d make a 30% down payment and borrow the rest. But his mortgage broker said a jumbo loan would come with a 4.65% fixed rate, costing thousands of dollars in extra interest payments. So Mr. Schindler, a financial adviser, put 45% down, trading a jumbo mortgage for a smaller 4.37% rate. “It was the perfect middle ground,” he says.

As luxury-home sales take off, some home buyers with deep pockets are using cash to dodge large mortgages. Some are making massive down payments in exchange for a smaller loan with a lower rate. Others are sticking to all cash.

“We’re seeing more and more cash buyers coming into the market in the jumbo arena—much more than we’ve previously seen,” says Jeff Gennarelli, president of Bridgeview Bank Mortgage Company, based in Lombard, Ill.

Why the change of heart? With yields on deposit accounts at record lows and concerns about future returns on equities, high-net worth home buyers are focusing on maximizing savings, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Private jumbo mortgages—starting after $417,000 in most of the U.S. but at $625,501 in some pricier metro areas—charge higher rates than smaller home loans, averaging 4.04% compared with 3.54%, respectively, according to mortgage-info website Signing up for a fixed-rate $1.5 million mortgage, for instance, would cost nearly $1.1 million in interest over the life of the loan.

By increasing their down payment, borrowers save on interest while still taking advantage of tax benefits. Taxpayers can usually deduct interest payments on a total of up to $1 million of mortgage debt. In other cases, luxury-home buyers are ditching mortgages to get a leg up on the competition.

Sales of million-dollar homes are on the rise nationwide, and some buyers are encountering housing boom-era style bidding wars. Real-estate agents say luxury home sellers are more likely to accept an offer if it doesn’t rely on financing, a process that can delay the final sale.

In upscale Short Hills, N.J., Arlene Gonnella, an agent with Weichert Realtors recently sold a $2.2 million home to a buyer with an aggressive offer: cash for the full asking price.

Still, buyers have to weigh pros and cons to decide between cash, a small mortgage or a jumbo home loan. Here are some points to consider.

• Liquid assets: Buyers should consider a large down payment or paying all cash only if they’ll be left with enough liquid funds to cover expenses and goals over at least the next five years.

• Interest rates: The Federal Reserve plans to keep interest rates very low until at least mid-2015, meaning savers still have years of earning close to zero on their cash. Buyers will have to determine whether their cash might be put to better use in a home that will ultimately save them thousands in mortgage-interest payments.

• Local market conditions: Speak with local real-estate agents and check listing sites like TruliaTRLA +0.22%and Zillow Z +0.49%to find out how many luxury homes in the area sold recently and at what prices. If few homes have sold in the past six months or they’re selling well below the typical asking price in the neighborhood, that could lower the home’s appraised value, making it harder to get a jumbo mortgage.