The Wall Street Journal states that a homeowner’s goal of having a custom residence may increasingly be linked to custom loans as wealthy borrowers are drawn to loans with shorter repayment periods of 10, 15 or 20 years.
As I prepare for another strong year of selling luxury real estate in South Florida, I’ve noticed an interesting trend. Although cash will always be king, buyers are being lured back into financing their luxury purchases. Two recent offers on a $3 million penthouse have a financing component with buyers under 40 years old again endorsing this trend.
One out every three transactions for the last six months have been financed and the buyers are selecting their terms more carefully than before:
Lower rates over shorter terms save the borrower thousands of dollars in interest over the life of the loan.
Refinancing–borrowers may be able to keep a similar payment on a shorter term jumbo loan.
Tax benefits–borrowers can usually deduct interest payments up to $1million of mortgage debt.
The shorter repayment period provides a middle ground between interest and tax deductions.
Moving away from 30 years is a rate play strategy. If clients notice distinct discounts for the shorter period they will buy into the loan. For instance, if the starting rate on a 30 year jumbo is 4.5% and the starting rate on a 10 year jumbo is 3.4% the borrower pays more than $1.2million in interest compared with a rough $271,000 with a 10 year term.
Babyboomers strive to pay off their mortgages before retiring.
Borrowers are now choosing their term and watching rates closely.
On a cautionary note I encourage buyers to be aware of longer than customary closing times still required as the lender processes the loan. Julie also encourages buyers to get their financing options in place before going to contract so that a mortgage pre-qualification letter or approval can be submitted with the offer. Sellers are still very nervous of financing contingencies in the luxury market and do not wish for their property to be tied up for an unreasonable time awaiting loan approval.