If you are a home buyer here in the Chicago area or around Illinois, and are looking for a Jumbo mortgage, your options arent what they used to be. A Jumbo loan is a mortgage higher than the conforming loan limit set by Fannie Mae and Freddie Mac, the two big purchasers of loans on the mortgage after-market. The current Fannie Mae limit here in the Chicago area is $417,000 for a single family home, so anything above that is considered a Jumbo mortgage. Because these loans arent covered by Fannie and Freddie, Jumbo loans are considered slightly riskier than conventional loans and have always been a little more expensive. Last summer, before the credit crunch (also known as the sub-prime melt down) hit the mortgage industry, the premium on a Jumbo 30 year fixed rate was just a ¼ point higher than a conforming fixed rate. This made sense at the time. Jumbo mortgages are typically made to people with higher incomes, good credit and good assets. These are usually people who have owned homes before, and are considered good credit risks. But then the credit crunch hit, and suddenly the market for Jumbo loans disappeared. The market for Jumbo loans has returned, but now the difference between a 30 year fixed rate Jumbo and the 30 year fixed rate conventional has grown to as much as 1% difference in rate, so if a conventional is at 6.0%, a Jumbo would be at 7.0%.
This means that Jumbo loans have gotten much more expensive than they were before. If you are a Jumbo buyer, the difference in rates and the larger loan size means you are paying thousands of dollars more now than what you would have before. So what are your options if you are in the market for a Jumbo loan? Do you need to just grit your teeth and pay the extra money? Not necessarily. There are a few options for Jumbo buyers that can keep the rates and payments down, and save money.
- Adjustable rate Jumbos are still competitive. The market for fixed rate loans has been hit the hardest, but there are still adjustable rate loans which are priced more aggressively. The most popular adjustable mortgages are actually a combination of a fixed rate and an adjustable. That is they are fixed for a set period of time, typically 5 or 7 years, before they become ARMs. This gives you the security of knowing that your payment and interest rate are fixed for the first 5 or 7 years while saving you thousands of dollars in payments. If you are planning on staying in the home longer than that you are taking a risk that payments may go up, but you can refinance your mortgage at any time, and odds are good that you will have some opportunities to refinance into a lower rate sometime down the road.
- 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. Lets say that you are buying a home for $700,000 with a 20% down payment and financing $560,000. If the interest rate for a 30 year fixed rate on the full loan amount is 6.75%, the payment would be $3,632 per month. If you break the mortgage in to two pieces, the first mortgage would be at the conforming limit of $417,000 and the second mortgage would be for the difference, $143,000. Lets say the rate on the first is 5.75%. That gives you a payment of $2,433 per month. The rate on the second is higher, say 6.50% for a fixed rate. This means a payment of $904 per month. Add the two payments together and you get a total payment of $$3,369 a savings of $263 each month compared to taking out a single jumbo loan.
- 3. Portfolio Investors. All the problems with Jumbo mortgage pricing stem from the breakdown in the mortgage backed securities markets. With the uncertainty in the market, buyers for these loans have dried up and prices have risen. But there are some lenders who dont sell their loans in the mortgage after-market. These lenders price their loans based on what makes sense for their own investment needs. We have one lender who is currently offering Jumbo loans at 6.125% with no points, much lower than anyone else in the market. The guidelines are tighter and the money is available only for a limited time, but it is a great deal.
The conventional wisdom is that the credit markets will eventually loosen up and Jumbo mortgages will be in demand again. When this happens I expect that the rate difference will narrow and Jumbo loans will be priced much more attractively. In the meantime, there are still options.