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At a time when many Americans are struggling to qualify under stiffer mortgage guidelines, there is a surprising increase in mortgage loans for million-dollar home purchases. Wealthy Americans are taking advantage of record low interest rates and are borrowing to finance their luxury homes. These loans are “jumbo” loans, defined as greater than $417,000 and are not guaranteed by Fannie Mae or Freddie Mac because of their size.
The record level of mortgages for million-dollar homes and beyond is due in part to the surge in the stock market this year. Stocks indexes have hit record highs, gaining 7 percent on average, making selling an investment portfolio less enticing. Wealthy buyers can leave money invested where it earns a greater percent on return than divesting it to spend on real estate. “High-net-worth borrowers don’t have to borrow. They choose to, so they’re very strategic when they borrow,” says Erin Gorman of Bank of New York Mellon Corp.
Stock market gains, combined with low interest rates, make a great scenario for those with wealth. Interest rates are at record lows, currently 4.13 percent on a 30-year-fixed term compared with 4.31 at this time last year. Because interest rates are expected to climb again in coming months, many buyers are moving on the real estate market now.
In the 100 largest metro areas in the U.S., mortgage loans for homes from $1 million to $10 million increased to a record level of more than 15,000 in the second quarter of 2014, according to CoreLogic, a property data firm. Mortgage loan applications for over $2 million at Bank of New York Mellon Corp were up 30 percent since last year. Union Bank’s average loan size is $900,000 and the bank wrote 350 loans for more than $2 million. In Southern California, the trend continues, where the average loan has increased from $800,000 to $1,000,000 and has bolstered the local economy, says Mark Cohen of Cohen Financial Group, a mortgage broker in Beverly Hills.
Homes in the multi-million dollar range are selling and strong sales have increased market confidence. In the 30 largest metropolitan areas of the country, homes listed at more than $2 million sold at the highest rate since 2006 during the first half of this year, according to CoreLogic. The National Association of Realtors confirms this trend; citing existing home sales priced at $1 million and above are up 8.5 percent over June 2013. A Redfin study found that sales of homes owned by America’s elite 1 percent, increased 21.1 percent since January 2014.
While mortgage loans have increased for million-dollar homeowners, cash sales still make up 32 percent of existing home sales in the last year, according to the National Association of Realtors. For wealthy homebuyers with the option to use cash, it can be easier than completing mortgage paperwork and also prevent bidding wars with other buyers. Lenders are aware of these concerns and cater to the wealthy market. Many banks offer mortgage deals to a client with an existing relationship that may not otherwise be advertised. Katherine August-deWilde, president of First Republic Bank, a lender specializing in jumbo loans, says, “Mortgages are very often how we meet a client. We generally address pricing if you have a large relationship.”
By Stacey Wagner