Mortgage Considerations For Luxury Homes

Luxury home buyers should understand that their segment of the mortgage market has some key differences from the mainstream lending market. Getting a multimillion dollar loan means going outside the government-sponsored FHA conforming loan network, stricter credit standards, higher down payment requirements, and a limit to the amount of interest borrowers can write off against income tax liability. Here are some things that luxury home buyers should consider before signing their next purchase contract.

Higher Down Payments

The first thing that luxury home buyers should realize is that they will need to come up with a higher down payment than the regular buyer. We just lived through an historical credit expansion, the age of lending insanity – interest only mortgages, no down payments, Option ARM’s, negative amortizing notes, and lots of other fun stuff.

Times have changed and borrowers looking to take out multimillion dollar loans are operating in a 40-80 loan-to-value (LTV) environment. This means that creditors now require between 20% to 60% equity investment from investors before they are willing to write mortgages for the remaining purchase amount.

The LTV requirement varies depending on the financial strength of the borrower, price of the loan, and uniqueness of the property. The higher down payment ensures only well off buyers with a good deal of cash will get credit, and the added equity investment makes it less likely for buyers to default on their loans.

Mortgage Interest Deduction Limits

Mortgage interest deductions are a big draw for home buyers, in many cases providing the needed incentive to go from renting to owning real estate. In essence, writing off mortgage interest against income tax liability effectively reduces the cost of debt capital. For example, a home buyer in the 25% income tax bracket who can write off interest on a 4% loan will actually be borrowing money at a 3% effective interest rate – 4% x (1 – 25%).

For high income earners the mortgage tax deduction becomes even more useful. What a lot of people do not realize is that the IRS limits the amount of interest home owners can deduct. The current limit on mortgage interest deduction is $1 million. This means that loans in excess of that will only be able to deduct interest on the first $1 million – the remaining amount will not provide any tax shelter.

Property taxes are still fully deductible.

What’s Available In The Current Market

Current non conforming rates for a loan up to $5 million are in the 4.5 % T0 5.00% range. Interest only rates are available but limits are restricted. Much higher loans are available on a case by case basis.

Stated income loans and adjustable rate mortgages (ARM’s) carry much higher interest rates, and are difficult to find for multimillion dollar luxury homes.

This article was written with information provided by John Devlin, owner and loan officer for Landmark Loan Center.

John can be reached at 714.402.2250, or [email protected]