No generation has been as active in its retirement as the baby boomers. Demographic analysts say this ambitious generation sees the years after age 60 or 65 as an opportunity to start the businesses, non-profits and artistic endeavors that they always wanted to pursue. So it's not unusual for baby boomers to seek out new sources of investment income long after they've already been successful. Creative financing tools for luxury homes are becoming an increasingly common part of that equation. Rather than rushing to pay down the principal, as their parents did, today's entrepreneurs are more likely to look for ways to free up cash for their new ventures. One newer type of loan called "ladder financing" may be especially attractive to upper-end home buyers. It allows the borrower to compartmentalize financing with several different loan products.

For example, if the buyer requires an $8 million loan, he might finance the first $4 million on a 30-year, fixed-rate loan, another $2 million on a five-year, fixed-rate loan, and the remaining $2 million on an equity line. "This type of loan product may come up when someone is doing a cash-out refinance on a home and they need that money to fund another venture that they can expect a larger return on," says Tim Kruger, senior vice president of the Private Mortgage Banking Group in Sherman Oaks, Calif. "They know that within six months, they'll have a certain amount of profit, and they expect within three to five years they'll have another payout. They'll utilize that money and be left with a $4 million mortgage." Ladder financing is an exclusive type of loan product that's available only to individuals of high net worth. It could be appealing in the current economic climate of fluctuating interest rates. "It's a way to sort of mitigate risk," Kruger says. "When you get a mortgage, nobody knows exactly what the best loan product is. You could get a 30-year fixed rate at 6.5 percent, and for the next 10 years be overpaying compared to the interest rate you'd pay on a short-term loan."

Another option: financing an initial amount at an interest rate tied to LIBOR (the London Interbank Offered Rate, a standard financial index whose changes have generally been smaller than changes in the prime rate). The rest of the financing package could be a combination of fixed and adjustable rates at varying intervals ranging from five years to 30 years. Whether ladder financing is a better option than other types of loans-such as interest-only, option ARM (adjustable rate mortgage) and pledged-asset loans-depends on the individual buyer's circumstances. Kruger recommends that buyers have a keen sense of their own financial situation before entering a ladder financing package. "This product isn't for everybody," he says. "For this type of product, it's really important for the consumer to have a high level of understanding about what it is that they're committing to, and the risks. But every situation is different, and for some clients, this product could meet their needs very well." 

by Jennifer Martin