It's the high-end version of a free toaster for opening a bank account: To entice wealthy customers to take out large home loans, more banks are offering perks worth tens of thousands of dollars. Luxury-property buyers — many of whom could easily pay cash — are getting discounts on mortgage rates, closing costs and "points," which are optional fees that borrowers can pay upfront to obtain a lower interest rate. Earlier this year, Bank of America offered a 0.5-percentage-point discount on points paid toward mortgages for customers who have more than $250,000 in assets with the bank. Wells Fargo is discounting mortgage rates for some clients who maintain at least $1 million in assets, including in its savings and brokerage accounts. Chase Private Client, whose clients have roughly $500,000 to $5 million in assets, says it reduces closing costs.
The savings can be significant. For example, reducing the mortgage rate from 4.05% to 3.8% would save roughly $77,500 over the life of a 30-year, $1.5 million mortgage. That's a lot of toasters.
"Our overall jumbo-loan business has increased, which we clearly attribute to the pricing incentives," says Matt Vernon, home-loan sales executive at Bank of America.
Why do they do it? Benevolence isn't driving these lenders to offer discounts. Recent regulations have reduced revenue from fees that banks collect on things such as overdrafts and debit cards. To recoup lost revenue, banks are aiming products and services at clients with substantial assets. Many high-end buyers who receive the incentives take out private-market jumbo mortgages, which in most parts of the country start after $417,000; in some pricey areas, including New York and San Francisco, they begin at $625,501. Jumbos tend to have higher interest rates than smaller loans, and the federal government doesn't guarantee them.
Banks say that by offering special discounts to wealthy clients, they're trying to encourage customer loyalty. Housing experts say the lenders are giving high-asset borrowers breaks that other shoppers can't get.
"The banks, in essence, are cherry-picking who they wish to offer these lower rates to," says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles. That's largely because these clients present a lower risk of falling behind on loan payments than less wealthy clients, he says.
Should you do it? Homebuyers should consider a few things before jumping at bank incentives.
Determine how long you plan to keep your home. Someone who intends to stay for the long haul may consider skipping the upfront discount in closing costs and go for a better mortgage rate, which in many cases will lead to greater savings. Discounted or waived closing costs may result in a slightly higher mortgage rate.
Ask for a better deal. Keith Gumbinger, a vice president at HSH.com, says that buyers with sizable assets could ask competing banks about promotions that target high-caliber clients. If a better offer comes through, the buyers could ask their existing bank to meet or beat that.
Weigh the pros and cons of paying cash. Buyers who can buy with cash will save tens of thousands of dollars in interest. If they need access to that cash later, though, it may be harder to get than before the recession, says Stu Feldstein, president at mortgage-research firm SMR Research. Cash-out refinances, in which borrowers refinance their home for more than they owe, draw down the equity. Most lenders now require at least 20% to 25% of equity to be left in a home after withdrawals.