FREE Newsletter
Recommended Links
My Million-Dollar Mortgage is at 1.875%*
(and I am very happy about it)
By Paul Wylie, Founder, LIBORATED.COMTM
March 4, 2009
That’s not a typo in the article title. It is not a teaser rate. It is not an option ARM rate. This is not a toxic mortgage. This is not a special program or a “Friends of Angelo” deal. My mortgage, and others like it, is available on the open market, BUT it is not ideal for everyone. And no, it will not always be this low.
My million-dollar mortgage on my home in Southern California is an adjustable loan tied to the 1-month LIBOR. It has an interest-only option, meaning within a designated time span, I can make smaller monthly payments that only go toward interest, not interest and principal. The loan rate is LIBOR plus 1.50%, creating an interest rate that fluctuates with LIBOR. As a point of reference, most multibillion-dollar, A-credit corporations are paying a margin of 2.50 to 4.50% on their LIBOR-based loans and credit facilities.
I feel great and fortunate to have such financing. In my previous career, I was CEO and principal of a nationwide company that had $1.7 billion credit lines that were tied to the 1-month LIBOR at margins of .625 to 3.00%. A combination of banks and Wall Street firms provided the lines, which I guaranteed in part with personal funds (you could say I had “skin in the game” when it came to my company’s solvency and performance). It was during this time that I became a student of LIBOR and a proponent of financing programs built on this vital global index. My company maintained liquidity and accessed operating capital thanks to LIBOR-based credit. It gave me the opportunity to manage cash flow and provide maximum benefit and opportunity for our staff and our clients.
I use the same philosophy with my personal residences—an aggressive but carefully researched and closely monitored use of LIBOR-based lending to enhance cash flow and ensure liquidity for the fullest practical range of investments and financial needs. I’ve used a LIBOR loan strategy for over a decade.
Before this becomes a “too-good-to-be-true” story, let’s acknowledge the obvious—low LIBOR rates can turn into high LIBOR rates, an ever-present risk with this form of financing. LIBOR shot up in Q4 2008 with the collapse of Lehman Brothers. Banks were terrified of even loaning to brother banks; therefore, they charged much higher interest for such interbank loans to cover the perceived risk. Perception matched reality as mighty institutions were shaken or shut down that fall season. As of Q1 2009, LIBOR rates have eased considerably although markets continue to tumble and some of the biggest names in the financial industry, such as Citigroup, AIG and Royal Bank of Scotland, face extinction, dismemberment, nationalization, or some combination of the above.
I wasn’t thrilled during the last LIBOR spike or any of the other rate surges in the last decade when I was paying approximately 7% on my mortgage. However, I can comfort myself when I look at corresponding rates on jumbo 30-year fixed mortgages. They are usually similar to LIBOR loans at the most expensive peaks. The difference—jumbo fixed loans stay at that level while LIBOR loans go back down when the LIBOR index relaxes. To me, this makes the upside risk tolerable and manageable.
I believe in high insurance deductibles, entrepreneurship and LIBOR loans. These choices are not for everyone. You need the right liquidity, income, assets and psychology; otherwise, the highs will never be worth the lows. But if you can structure your resources and expectations accordingly, you can take advantage of a LIBOR-based mortgage strategy. As of March 2009, this is the second period in the past decade that I have paid under 3% for my million-dollar mortgage. And I am very happy about it. I earned this cash flow boon by becoming LIBORATED.
Paul Wylie is a mortgage and real estate industry entrepreneur, consultant, and author with more than 25 years of experience. Paul founded Metrocities Mortgage in 1989, a “top 50” lender that grew from six employees and $125 million in annual loan production to 1400 employees and over $10 billion in loan production across the country by 2005.