Illinois Mortgage Rates and News

Chicago, IL -The Jumbo loan was an unintended victim of the sub-prime tsunami that hit the mortgage market back in August. When the sub-prime market tanked it wasn’t really that surprising. I know I shook my head in wonder at some of the loans that we approved. It doesn’t take a genius to know that lending money to a borrower with no money down, stated income and spotty credit is higher on the risk scale than some of Evil Knievel’s jumps.

Jumbo loans are different. Jumbo mortgages are loans above the lending limit of Fannie Mae and Freddie Mac, the two biggest buyers of loans in the mortgage aftermarket. This means anything above $417,000 for a single family home in Illinois and throughout the continental US. Jumbo mortgages are slightly riskier than conforming loans (those eligible for Fannie and Freddie purchase). It is the old eggs in one basket theory - if you are an investor you have less risk of losing your principal by carrying four $200,000 loans than if you have one loan for $800,000. Because the risk is slightly higher the pricing was slightly higher than conventional loans. But the truth is that jumbo mortgages have a lower default rate than conforming mortgages.

Before the mortgage meltdown the premium for getting a jumbo loan was low – in most cases about a quarter of a point higher than conforming loans. After the mortgage meltdown anything that wasn’t conforming was toxic. Overnight the jumbo market virtually disappeared. Lenders have now come back into the market, but the pricing on jumbos is much higher than conforming loans. Right now the difference is a full point higher.

So what can you do if you need financing and you are in the jumbo price range? You have a few options. The biggest price differences are with fixed rate loans. But if you are willing to take a little more risk and go with a long-term adjustable rate mortgage, the spread gets much thinner. A 7 year ARM, a loan with a fixed rate for the first 7 years, is priced much more aggressively than a jumbo fixed rate. You are taking a chance if you expect that you will stay in the house longer than 7 years and you think that this is as low as rates will go in that time, but over all this isn’t a bad bet. Seven years is a long time and if you still want a fixed rate you can always refinance later.

Another option is to break the loan into 2 parts, a first and a second mortgage. This works best if you are in the lower range of jumbo mortgages. Here is how this works. Let’s say that you are buying a home for $700,000 with a 20% down payment and financing $560,000. Let’s say that the interest rate for a 30 year fixed rate on this loan amount is 6.75%. That means a payment of $3,632 per month.

This is how it looks if you break the mortgage in two. The first mortgage would be at the conforming limit, $417,000. Let’s say the rate here is 5.75%. That gives you a payment of $2,433 per month. The amount left over, $143,000, goes into the second mortgage. The rate on the second is higher, say 7.5% for a fixed rate. This means a payment of $998 per month. Add the two payments together and you get a total payment of $3,432 – a savings of $200 each month compared to taking out a single jumbo loan.

The savings lessen as the second loan gets higher, but this is  a great strategy and and one worth exploring. If you are looking to buy ahome and get a jumbo loan in Chicago, the Chicago area, throughout Illinois or throughout the country and want to run some numbers contact me here at Illinois Mortgage Rates and News. Jumbo rates should improve and get closer to the conventional rates over time, but until that happens this is a great way to save money

Illinois Mortgage Rates and News

Updated 06-29-2008

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