July 20, 2012 at 7:19 AM ET
After seeing Mark Zuckerberg has scored a 1.05 percent mortgage rate on his $6 million California home, we have just two questions: Why does he need a mortgage? And where can I get one like that?
It turns out that 1 percent mortgages are not reserved for billionaires like Zuckerberg.
As South Carolina entrepreneur Ramona Fantini has learned, many modern homebuyers find such tiny mortgage terms hard to fathom -- even as Freddie Mac and other traditional lenders dangle bargain-basement rates never before seen in the U.S. economy. She secured a 1.07 percent adjustable rate loan to recently buy two different homes.
“I’m not a bragger and I’m also not embarrassed about it. But when I tell people about that rate, they don’t even believe you,” Fantini said. “So you do quit telling them.”
Several financial companies offer select clients creative ways to access ultra-low-rate home loans -- some below 1 percent. Such deals also allow consumers to circumvent the mammoth, time-consuming mound of income and debt documentation now required by mortgage lenders.
There is one catch, though. If you want to try to slip beneath even the record-low interest rate offered this week by Freddie Mac, 2.69 percent on a five-year ARM, the borrower typically must have a healthy amount of collateral. That may include stocks, bonds, and mutual funds, their own profitable business, deep savings, or in some cases, a rich relative, experts say.
Fantini, owner and CEO of Hilton Head-based Pino Gelato, used her inexpensive loan to purchase outright two local houses -- one priced at $150,000 and another at $200,000 -- for two of her employees. Her workers will live in those homes and slowly pay back Fantini’s company, and not a bank, at that 1.07 percent adjustable rate.
“Right now, because it takes so much in down payments to qualify for a mortgage, it’s been a huge plus for these employees,” Fantini said. “We do it just because we believe in giving back. We don’t even tell (prospective) employees we have this available to them.”
To obtain her loan, Fantini worked with Tyler Vernon, founder and principal of Biltmore Capital Advisors in Princeton, N.J.
“You don’t have to be a billionaire," Vernon said, “to enjoy preferred interest rates.”
He has arranged for nearly 100 loans at rates ranging from 0.96 percent (for someone who borrows more than $1 million) up to 1.5 percent (for a client who secures less than $500,000). One of those loans was only for $50,000. One topped $8 million.
“Most people do actually use this for a real estate investment,” said Vernon, a former Merrill Lynch vice president. “And it’s definitely cheaper than Zuckerberg’s cost of money.”
How is this accomplished without going the usual bank or mortgage-lender route?
At his previous job, Vernon learned that during the 1980s Merrill Lynch, along with other large financial services companies such as Morgan Stanley Smith Barney, offered loan rates of 0.6 percent to United Parcel Service executives because that company’s once-private stock was so stable.
“So there were a few companies that set up these unbelievable rates targeted specifically to UPS. They didn’t make money on the loans but they knew they would get the (UPS honchos’) asset management business, which led to trades and commissions,” Vernon said.
After launching Biltmore Capital Advisors -- an independent firm that can approach any custodian on the market -- Vernon applied that same basic philosophy for some his most financially set customers. In his current role, Vernon can group his stable of clients -- and employ “the UPS model” -- to entice the big boys on Wall Street to loan big money at minuscule payback percentages.
“We say, hey, we can bring you hundreds of millions of dollars in asset management business. But if you want this business, you’ll have to get competitive (with your interest rates). If you want the business, you’re going to have to look at it on the aggregate,” Vernon said.
“So instead of going somewhere and saying, as an individual investor, I want to borrow $300,000 or $400,000 or $500,000, this is kind of the Wal-Mart model,” Vernon added. “We go to a (financial services) company directly and say we can bring you $100 million or half a billion over time. What can you do? So they basically give us really good rates.”
In a sense, that strategy -- using collective wealth as the appeal -- isn’t a distant stretch from how Zuckerberg, estimated to be worth $15.7 billion -- grabbed his dirt-cheap mortgage.
The main difference there, of course: The Facebook founder could have simply plopped down a suitcase (or three) jammed with cash to pay for his entire, multimillion-dollar spread. Financial independence coach Ike Ikokwu called Zuckerberg’s mortgage shrewd, however, because “good debt,” like mortgages, increases personal net worth and offers tax benefits.
Still another option for supremely low-interest loans: Go through a rich uncle or another well-to-do family member. That arrangement may be more common than you know, said Tim Burke, the CEO of National Family Mortgage in Boston. He has set up thousands of such loans between relatives, totaling more than $43 million.
“We have developed this product where, through inter-family loans, certain parents are finding value helping their adult children -- if they are not qualifying for home loans and not meeting rigorous underwriting criteria. So instead of making payment to the bank, the adult children are making payment to Mom and Dad,” Burke said.
For these sorts of family loans -- particularly for loans above $10,000 -- the Internal Revenue Service has established “Applicable Federal Rates” (or AFRs) that should be charged to a borrower to help them avoid “unnecessary tax implications,” Burke said.
Every month, the IRS publishes a new set of AFRs, in part to help calculate interest on market loans made between family members. This month, the AFR for loans to be repaid within three years is 0.24 percent, and the AFR for a loan to be repaid in three to nine years is 0.92 percent.
Those scheduled payments to the parents also allow the loaners to write-off mortgage interest deductions on their taxes, just like they do a traditional home loan obtained from a bank.
“But Mom or Dad would never dream of foreclosing on son or daughter,” Burke said. “And as I like to say, who has more underwriting experience than Mom or Dad?”
The family loans Burke has helped his clients launch have ranged from $11,500 to $1.3 million, he said.
“This is just one of these tools wealthier families have been using for years, and we’re just trying to take it mainstream,” Burke said. “I know a lot is said about people not borrowing from friends and family, but this is a great way to beat the bank and get a rate like Zuckerberg.”