The New Generation of Mortgage Products
McCarthy, Joseph L., Chief Executive (U.S.)
Your parents probably told you that the best investment you could ever make would be to own your own home. That may have been true when annual, double-digit upticks in real estate value were practically automatic, but a decade ago, the balloon popped, leaving investors of all income strata scrambling for alternatives. These days, buyers are more realistic about the role a home plays in a broader investment portfolio. And mortgage brokers and other financial institutions are whipping up a bewildering range of new products to give investors maximum flexibility. What's clear is that the tax deductibility of interest on a home mortgage figures as perhaps the last significant tax deduction. And the higher the tax bracket, the bigger the deduction.
Private banks and commercial institutions alike will move mountains to customize a product such as a jumbo mortgage to meet your needs. Outside jumbos, one new product enables buyers to sock away all or part of a down payment on a home in investment vehicles such as variable and fixed annuities, and in life insurance policies. At least with the life insurance variation, a down payment earns taxdeferred interest, providing a chance to lower the cost of your loan by 20 percent or more.
"Why let the single largest payment you'll ever make sit there as dead equity?" asks Preston Martin, chairman of San Francisco-based HomeVest Financial Group, which created the life insurancebased, or "combined asset," mortgage. "There's tax-deferred buildup and the ability to borrow against the policy at net zero cost with no fixed repayment schedule."
Here's how the HomeVest CAM works: Let's assume a 40-year-old, married, nonsmoker with an annual income of $ 170,000 and in a 40 percent tax bracket seeks to buy a home priced at $600,000. Let's say the buyer puts down 20 percent, or $120,000, financing the remainder through a 30-year, fixed-rate mortgage at 8.375 percent, in which the payments would be $3,648. With a CAM, you might put that $120,000 into a life insurance policy with a projected rate of return of approximately 6.25 percent and a guaranteed rate of 4 percent. Your loan would be for $600,000, because you still have to pay the seller the balance, and you would have higher monthly payments of $4,645. But over time, says Martin, a former vice president of the Federal Reserve Board of Governors, the appreciation from the life insurance policy would offset your total costs. …