Last week, in an article published by MarketWatch, AnnaMaria Andriotis highlighted perks that certain banks are using to lure wealthy homebuyers, and called it “the high-end version of a free toaster for opening a bank account.”
Wealthy property buyers can easily fork up cash to pay for their homes, but why pay everything at once when you can get a nice rate, especially when you’re rich and banks are enticing you with discounts on these mortgage rates, closing costs and "points," which you can pay upfront to obtain an even lower rate.
Of course rates like Zuckerberg’s 1.05% are not for everyone. It’s a rate for the billionaires. Not every wealthy person may have a billion dollars sitting in their bank account, but let’s say you have a quarter of a million dollars. That is quite a bit of money right? Enough for your kid’s four year private college education, and if you’re a Bank of America customer with at least $250,000 in the bank, that’s enough to give you a 0.5 percentage point discount on the so called “points” paid toward mortgages for attaining a lower rate.
Moreover, if you’re a millionaire and a Wells Fargo customer, you’re entitled to mortgage rate discounts as well. Closing costs can be reduced for Chase Private clients with assets between half a million to five million dollars in assets.
No doubt a lower rate can save you quite some money. Andriotis cited that just by reducing the mortgage rate a quarter of a percentage point from 4.05% (the average rate on large private mortgages) to 3.8% would save the borrower over $70,000 for a $1.5 million, 30 year mortgage.
Because of the attractiveness of some of these perks and the potential savings low rates entail, the “jumbo loan business has increased.” By targeting the rich, banks are essentially price discriminating. Wealthy borrowers are being offered rates and perks a normal person can’t get. Truth is, wealthy borrowers have a lower default risk as compared to less wealthy clients. And just like the way insurance works, the higher the risk, the more expensive the insurance and vice versa.
Nonetheless, Andriotis mentioned some very good points to consider before signing up for these bank perks in order to obtain a iscounted mortgage rate.
First, for those planning to keep their homes for a long time, for retirement, for their grandchildren, or for whatever reasons, skipping out on a discount in closing costs may lead to even more savings. The general idea is that a lower closing cost may translate into a higher mortgage rate, which in the long run is a bad idea.
Second, for those with substantial asset, leverage that fact and shop around for the best deal. All banks want wealthy customers.
Third, for those with cash, buying a home outright will help save on interest, but make sure to have some cash on hand in case of emergencies. The cost of borrowing money is not cheaper than paying mortgage interest, especially if you’re really in need of it.