TARRYTOWN, N.Y. — Michael Covino believes no millionaire should have to live without a dream home.
More specifically, Covino, founder of the Luxmac mansion mortgage service, believes no millionaire should have to hock a personal portfolio of stocks, bonds and other assets to scrape up the down payment for a luxury manse and — worse — suffer the humiliating capital gains tax bite that comes with liquidating several thousand shares of stock.
Stocks and bonds become collateral
Instead, Luxmac allows the well-heeled to post part of their portfolios as collateral for mortgages starting at $500,000, eliminating the need for down payments and private mortgage insurance. The average Luxmac home loan is $1.4 million, “and it goes up from there,” said Covino.
Luxmac originates, buys and sells mortgages. Last year, Covino said, Luxmac arranged 200 millionaire mortgages. The 18-year-old business employs 21 people and has written more than $2 billion worth of mortgages.
Covino said the “trend today is toward opulence in housing: people putting up environmentally smart houses, adding gourmet kitchens, gyms and backyard fun centers. We understand that market and know how to value these properties for loan purposes.” Because each borrower’s needs are different, he explained, “We tailor the plan to be as flexible as necessary.”
Tax avoidance is the big selling point of Luxmac mortgages, Covino said. In New York, for example, selling enough stock to make the 20 percent down payment on a country estate means paying a state tax of 7 percent on the value of what is sold , plus the federal government’s 20 percent capital gains tax, if the asset was held for more than a year.
“That’s a lot of money to give up to buy a home,” Covino said. While the 1940s mentality was to own the home “free and clear, that is not the best use of money today,” he added.
This is specially true if the buyer is trying to finance a mansion in the $3 million range — about what a manor with all the bells and whistles costs today, he said. In addition to sidestepping taxes, the Luxmac rich get richer, since the collateral stocks or bonds can continue to appreciate by gaining value or paying dividends.
On the first $1 million of the loan, which is tax deductible, Luxmac offers either a 15- or 30-year mortgage. The remaining $2 million is treated like a credit line secured by the house, and can be drawn upon for any purpose, including construction of the home.
Assets returned when equity grows
Once the borrower’s equity in the house equals what he would have had to put down in a normal mortgage, Covino explained, the borrower’s escrowed assets are released back to him.
For the most credit-worthy, Luxmac charges 7.5 percent on a fixed-rate, 15-year mortgage — a variable rate runs somewhat lower. Interest-only payments on the credit line can be tied to the interest rate on the one-, five- or 10-year Treasury note.
The six-month London Interbank Offered Rate, which tends to be lower than the prime rate at most U.S. banks, also may be used, he said.
Luxmac has experienced very few delinquencies, Covino said. “This type of financing is for the guy who has lots of money and wants to hang onto it.”