In my last post, I talked about how it is still possible to buy a home here in the Chicago area with no money down with FHA financing combined with a Down Payment Assistance program like AmeriDream or Nehemiah. But even if you are able to buy with no money for the down payment, there are still other costs you will need to come up with at the closing. You will need money to pay for the bank closing costs which include the appraisal and credit report, a commitment fee for FHA financing and underwriting and processing charges for conventional loans. Then there are title charges, transfer taxes, pre-paid interest, insurance and the money to set up

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your escrow accounts. The truth is, real estate is a high cost transaction. Even with out the down payment a typical real estate purchase will cost you thousands. So what happens if you are ready to buy now, but your pockets are empty and your wallet is still a little light? There are a couple of ways to buy with no money out of your pocket, but you need to plan ahead.

One way is to ask the seller to pay for your closing costs through a seller concession. You need to ask for this as part of your initial negotiation, once you have a signed contract it is too late. Most conventional loan programs allow the seller to contribute up to 3% of the value toward the buyer’s costs, and with FHA you can get a 6% seller concession. You will need to talk with your lender and have him put together a Good Faith Estimate of what all your costs will be to close. Once you know how much you are going to need, you can ask that the seller to pay that amount at the closing. From the seller’s standpoint, this is part of the price. Any money that he pays out is deducted from the sale price. If the contract for the home is $300,000 and they are paying $3,000 for closing costs and pre-paids, the true sale price is $297,000. It is important to phrase it so that the seller credit will be “toward closing costs”.

You can’t walk away from the closing with any extra money, so make sure you have a use for all the money you get as a concession. One of the great things about this program is that you can use it in different ways. Not only can you pay for the normal closing costs, but you can also use a seller concession to pay for points to lower your interest rate, or for more creative financing options like an interest rate buy-down. Remember though, the seller is looking at this based on how much they will net from the sale, but the appraiser is basing the value on the contract sale price. So it will need to appraise out at the full contract price. This can be more of an issue if you are asking for substantial closing costs along with a seller donation to pay for a grant from Nehemiah or AmeriDream.

Another way to pay for closing costs is through a lender credit. This is more common with illinois Mortgage Refinancing than it is with purchases, but it is a great option in some situations. As a mortgage banker, I can offer loans in a variety of price and cost variations. For people who are strapped for cash, it is possible to offer a slightly higher interest rate, but use some of the premium to pay for the loan costs. Whether this will work for you depends on your whole situation. But it is an option, and one more way to reduce the cash you need to close.

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Now that it’s April, I think it is finally safe to say winter is over here in the Chicago area. It’s been a long hard winter, and spring couldn’t come a moment to soon. But the baseball season has officially started, the sun is out and my phone is ringing with first time home buyers who are ready to take the plunge into home ownership. Yep, this is springtime in Chicago. First time home buyers Loan generally have two things in common. One, they are nervous about the home buying process and whether they will be able to qualify for a mortgage (especially now with all the economic uncertainty and the tighter underwriting from the mortgage mess), and two, they don’t have a lot of money saved up for a down payment. This wasn’t a problem a year or two back. Over the last few years 100% financing loans were the norm for first time home buyers. Now, with mortgage guidelines tightened (strangled?) and mortgage insurance companies running scared, no money down conventional loans have disappeared. So the question is, can you still buy a home here in the Chicago area with no money down?
The answer is yes. You can still buy a home with out any of your own money, but you will have to plan ahead. The best way left to buy with zero down is with an Illinois Fha Loans combined with a grant from a down payment assistance program. (There are plenty of reasons to buy FHA in our present mortgage market, even if you could qualify for a conventional loan). Most conventional loans now require a 5% down payment (it could be more in areas marked as declining markets). FHA only requires a 3% down payment. But even a 3% down payment can be a huge obstacle. The down payment can mean the difference between buying now, and waiting a few more years until you have put enough cash aside to buy. This is where the Down Payment Assistance programs (DPAs) come in.

Illinois Fha Loans guidelines say that you can buy a home with no down payment if the money comes as a gift from a relative or a grant from a charitable or non-profit organization. The gift from a relative is always an option, but if you don’t have a rich uncle to call on, there are plenty of non-profits that want to help you out. The DPAs take advantage of a loophole in the FHA guidelines. In a way, this is a legal form of money laundering. The home seller is actually paying for your down payment.

Here is how it works. When you find the home you like, you negotiate the contract so there is a concession on the price upfront which allows the seller to donate the amount to the DPA. The two biggest DPAs are Nehemiah and AmeriDream. With AmeriDream, the donation from the seller needs to be 3% of the sale price plus $500. The 3% will go for the down payment; the rest goes to pay for the organization’s administrative costs. The seller then agrees to give this negotiated concession to the DPA at the closing table out of the proceeds from his home after the loan has closed. The DPA in turn give a grant to the buyer for their down payment at the closing table. So the grant is from the DPAs own funds and the donation from the seller goes into their coffers to pay for the next home buyer.

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Why would the seller go along with this? Sellers are concerned with how much they will net, not how the loan is structured. So let’s say you were buying a home listed for $300,000. One way you could do this is offer a purchase price 3% ($9,000) below the list price. This means the seller is selling the home for $291,000. Another way you could do it is by offering the seller the full asking price of $300,000, but conditional on the seller donating the 3% to the DPA. Either way he nets the same amount, $291,000. (This is simplified because the administrative fee needs to be in there too). The important thing is to do this when you are first negotiating the offer. If you are negotiating on the same $300,000 home and the seller agrees to sell it for $290,000, you are going to have a hard time coming back later and asking him for more of a concession to pay for your down payment.

There are a few things to watch out for with this home buying strategy. First, the property has to be able to appraise out. You need to negotiate a price which will stand up to what comparable homes are selling for. Also, you need to make sure you follow the guidelines and get all the proper documentation. You will need to put the right phrasing in the contract, and get a few extra forms signed. Here is the wording for AmeriDream:

Seller agrees to contribute 3% of the purchase price ($ ), plus $500 (total $_______) to the AmeriDream Downpayment Gift Program.

There were some questions about whether these DPAs were legal and if the program could continue. But a court ruling last year kept the down payment assistance option open, so for now it is the best option for first time home buyers or anyone who wants to buy a home with no money down.

Keep in mind, the down payment assistance program takes care of the down payment, but you will still need money for closing costs, pre-paid interest and to set up the escrow accounts. There is a way to buy with not just no down payment, but with no money out of your own pocket at all. I’ll cover that in my next post.

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Not so long ago, FHA loans were the red-headed step child in the housing market. They didn’t get any respect. That wasn’t always the case. Back in the old days FHA loans were the only option for most first time home buyers or others who had little money to put down. FHA was the way for many borrowers to take their first steps into home ownership here in the Chicago area. Not only could you buy a home with a small down payment, but the entire down payment could be a gift, and your credit didn’t have to be perfect. There were problems with FHA loans, though. It took longer to get a loan approved and closed than with a conventional loan, and if there were issues with the homes condition (like peeling paint) the issues had to be fixed before closing. Many people felt that FHA underwriters were professional nitpickers, so if they had a choice, many Realtors and home sellers would take a conventional buyer over an FHA buyer. As time went on

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FHA became less and less of a factor in the market. Conventional loans came out with low, and later no down payment options, and other loans catered to borrowers with bruised credit. Another part of the problem was that FHA didn’t keep up with the market values. As home prices moved up in Dupage County and throughout the Chicago area, FHA kept their loan limits low, and became a non-issue for all but the lowest priced homes. Now, as the conventional market is in turmoil, it looks like FHA has another shot at its glory days, and there is no doubt that FHA financing is the best loan option for many Chicago area home buyers.

Over the last few years FHA has updated the way they make loans. They’ve eased off on their property conditions, and with direct endorsement underwriters we can approve and close an FHA loan as fast as we can a conventional loan. But the biggest change is that FHA has increased their loan limits here in the Chicago area and throughout the nation. In the Chicago area (this includes all of the collar counties including Dupage, Kane, Lake and Will) you can now get an FHA loan on a single family home up to $410,000. This is already making an impact. FHA’s market share in 2006 was about 3% of total mortgage originations. Today FHA is closer to 10%, and moving up.

Why would you consider an FHA loan over a conventional loan? Here are some of the advantages:

1. No Risk Based Pricing adjustments- Risk Based Financing is the idea that those borrowers with the best credit scores will be able to get the best mortgages rates, and those with lower credit scores will have to pay more. Fannie Mae and Freddie Mac, the two big buyers of mortgage loans in the mortgage aftermarket, recently changed their guidelines in a way that meant all but the very best borrowers will pay more for a loan. Now buyers with credit scores under 720 and with down payments under 20% are getting hit on their pricing. This isn’t the case with FHA. With FHA if you qualify for the loan you get the best pricing. You can qualify for an FHA mortgage with credit scores in the upper 500s – without any price hits.
2. FHA uses common sense credit guidelines –FHA looks at the buyers over all history, not just their credit scores. FHA uses a common sense underwriting approach that understands credit problems can happen to anyone. Their concern is that the problem has been addressed and isn’t likely to occur again. If you have had credit problems in the past, you may need to document why they happened and what you have done to correct the problems, but you aren’t automatically frozen out of a loan, as you would be now with most conventional loans. If you have some issues with your credit, give me a call before you are ready to buy. Working to fix your credit earlier will help you save money later.
3. You can buy with a low down payment – or no down payment – This is another area where FHA has a big advantage over conventional loans. It is now much harder to get a conventional mortgage with a minimal down payment. But FHA only requires 3% down. And this down payment can come from a gift from a relative or as a grant from a down payment assistance program. That means that you can still buy a home with no money out of your own pocket.
4. FHA allows a seller concession of up to 6% - By using seller concessions, you can structure your purchase in more creative ways. One way many buyers use this is by converting a seller concession into a grant from a non-profit down payment assistance program like Nehemiah or AmeriDream. Here is how it works. When you negotiate the contract with the seller, you would ask for a concession on the price upfront — the amount will usually be between three and a half to four percent of the price (more if you want to build in closing costs, too). Three percent will go for the down payment; the rest goes to pay for the organization’s administrative costs. The seller agrees to give this negotiated concession to the grant provider at the closing table, and they in turn give a “grant” to you for your down payment. This is all done on paper and no money really changes hands, but it allows you to buy your home with no money down. There are other ways to use the seller concession, including buying down your interest rate to lower your monthly payment. The important thing is to make sure you ask for the concession right up front when you first start to negotiate your purchase.
5. FHA is more lenient with past bankruptcies – With FHA you can buy a home 2 years after a Chapter 7, and 1 year after a Chapter 13 bankruptcy – sooner if the bankruptcy is medically related or due to actions beyond your control. You will still need to show that you have reestablished your credit and can afford your new payment.
6. FHA financing is available for Permanent Resident Aliens – With FHA you don’t need to be a U.S. citizen and you don’t need to have your green card. You will need to have a social security number, established credit and proof that you are able to work in the United Sates.
7. No cash reserves are required – This is another way that FHA differs from conventional financing. Saving up for a down payment is the biggest obstacle to buying for most first time home buyers. With conventional loans you need to have saved not only the amount for the down payment, but also have some money left over in reserve. With FHA they only require enough cash to close and you don’t need money in reserves.
8. No income limits – Many of the low and no down payment conventional loans are set up to help low and moderate income home buyers. This isn’t the case with FHA. It’s goal is to help more people buy homes and there are no limits on how much you can make.
9. Non traditional credit is accepted – Most conventional loans require that you have a credit score and an established credit history. But not every one uses credit. With FHA we can build up a credit history from other payments you have mad. This would include your rent and utility payments, and any other non-traditional credit you have used.
10. Mortgage insurance is lower than conventional – FHA splits their mortgage insurance into 2 parts – an upfront insurance which is added to the loan amount, and a premium which is paid monthly. If you are buying with a minimum down payment, the combined premium on FHA is better than it is with conventional loan programs – especially if your credit scores aren’t the highest.

These are other just a few of the advantages of FHA financing. There are other advantages of FHA financing which help some individual needs. One of the biggest things to keep in mind is the pricing. FHA pricing is as competitive as conventional financing –and much lower if you are buying with a low down payment or if your credit scores aren’t the absolute best. If you would like to see how FHA could work with your situation, give me a call or contact me. I would love to work with you.

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FHA just released their new loan limits for Northern Illinois and the Chicago area. This determines the maximum loan for FHA financing in Cook County, Dupage County, Kane County, Lake County, Will County and McHenry County. The limits are:

1 unit $410,000

2 unit $524,850

3 unit $634,450

4 unit $788,450

This is great news. As underwriting for conventional loans has become progressively tighter, FHA is shaping up to be a great alternative. Some of the advantages of FHA financing include:

3% down payment required – the down payment can come from a gift from a relative or as a grant from a down payment assistance program, so the buyer can come in with no money out of their own pockets.

FHA allows a seller concession of up to 6% - this allows more creative ways to structure your purchase, including ways to buy with no down payment or closing costs, or using this concession to lower your interest rate.

FHA is not credit score based – this means you can qualify for an FHA mortgage with credit scores in the upper 500s – without any price hits. With low down payment conventional mortgages the rates go up if your FICO score is below 680. FHA uses a common sense underwriting approach. It understands that credit problems can happen to anyone. Their concern is that the problem has been addressed and isn’t likely to occur again.

FHA is more lenient with past bankruptcies – you can buy a home 2 years after a Chapter 7, and 1 year after a Chapter 13 bankruptcy. If the bankruptcy is medically related or due to actions beyond your control, you can buy sooner.

FHA pricing is as competitive as conventional financing – the pricing on FHA is on par with any conventional program, and much lower if you are buying with a low down payment or if your credit scores aren’t the best.

These are just a few of the advantages of FHA financing. When I first got into this business, a long, long time ago, FHA was the preferred program for first time home buyers or others who didn’t have a lot of money available for a down payment. FHA lost favor over the years as more low down payment conventional options came on the market. It was hard to do an FHA here in Dupage county and other parts of the Chicago area when the max loan limit didn’t keep up with the increase in housing prices. FHA has worked toward modernizing their underwriting over the years, and it is now much more streamlined and user friendly. For many home buyers FHA is now the best loan alternative, by far.

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If you are a home buyer here in the Chicago area or around Illinois, and are looking for a Jumbo mortgage, your options aren’t 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 aren’t 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.

1. 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.
2. 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. 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. Let’s 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. 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 don’t 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.

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With the rates on fixed rate mortgages moving higher over the last few weeks, adjustable rate mortgages (ARMs) are suddenly popular again. Right now there is a huge spread between the rate on a 30 year fixed rate mortgage, and a 5-1 ARM, which is fixed for the first five years before it can adjust. The difference in rate now is 7/8s of a point, which is mind boggling huge. On a $300,000 loan this comes out to a savings of $166 per month. This spread means a home buyer here in the Chicago area can save thousands of dollars in payments by going with the adjustable instead of the fixed rate. But the savings come at a cost. By taking on an ARM, you are taking a risk that rates may be higher down the road, and if you are still in your home, and still in your mortgage, your payments would then move up.

Does it make sense to take the risk? If you’ve been following the news, there is lots of talk about the housing slump, and one of the mainstays of these stories is about the dangers of adjustable rate mortgages. There is no doubt that people have gotten in over their heads, and in some cases ARMs have been part of the problem. (A bigger part of the problem might be that they didn’t understand what they were getting into.) ARMs aren’t as dangerous as some think. They aren’t for every person or every situation, but used correctly they can be a great option.

So when does it make sense to choose an ARM?

1. When you don’t expect to be in the house for the long term - Most home buyers go with fixed rate mortgages because they feel safer taking on a mortgage where the rate and payment will always stay the same. But most people don’t stay in their homes for 30 years, especially first time home buyers. With job transfers, changes in life style and upward mobility, it is now common for homeowners to move after five to seven years. ARMs come with fixed periods for the first 5, 7 or even 10 years. Why pay extra for time you don’t expect to be in the home?
2. When you don’t expect to be in the mortgage long term – This one is harder to anticipate, but most home owners don’t keep the same mortgage, even if they stay in the house long term. Interest rates go in cycles, up and down. Refinancing used to be prohibitively expensive. Now no-cost refinancing (we pay all the closing costs by increasing the interest rate slightly) is common. Now if the mortgage rate drops by a half a point it makes sense to lower your payment by refinancing. Mortgages are now looked at as more of a financial planning tool. If you build up equity in your home, you may want to tap into that equity with a new loan. Again, if you think it is likely that you will refinance your mortgage in the next 5 – 7 years, an ARM may be a good option.
3. When you expect that your income will be increasing - This is the case with a lot of first time home buyers. If you are early in your career and expect that your income will be moving up, you are in a position to accept a little more risk that your payment will be higher down the road. By taking on an ARM you are able to take advantage of the savings now, when you need it most.
4. When you want to build up equity quicker – You can use adjustable rate mortgages to build up your home equity or as a way to increase your investment. One way is to pay the same mortgage payment you would make if your loan was fixed. If you did this with the example I used earlier and paid the $166 saving as an extra principal payment each month, you would pay down an extra $14,000, building more equity than you would with the 30 year fixed rate. Another way to approach this is by taking the savings and investing it in an outside investment where you can earn more than the mortgage interest rate. If you plan on doing this, you need to make sure you consistently add to your investment each month.

Those are a few reasons why you might consider an ARM, but for some people adjustable rate mortgages are the wrong way to go. Don’t take an ARM if you meet any of these criteria:

• You plan on staying in the home for at least 10 years.
• Your income is not going up, and you would have trouble making the payment if the mortgage payment goes up when the loan adjusts.
• You can’t afford the home if you don’t use the ARM.
• Taking on the extra risk will make it hard for you to sleep at night.

Whether an ARM is right for you depends on your own personal and financial situation as well as your goals and expectations. But ARMs aren’t something to be afraid of, and for many people they are a great way to save money. If you have any questions, or if you want to go over your own situation and see if an ARM would work for you, let me know.

Are you a first time home buyer in the Chicago area? Or are you someone looking for more information on how to save money when buying a home and getting a mortgage? I’ve put together a free 49 page Home Buyer’s Guide which goes into detail on the entire mortgage and home buying process. Just click on the link to download your free copy.

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Chicago, IL -Mortgage interest rates dropped sharply over the last week. Conventional fixed rates are now in the fives, their lowest point in the last several years. This is big news for consumers. Anyone who bought a home in the last few years should look at what they are paying now and see if it makes sense to refinance their mortgage. Anyone who is in an adjustable rate loan or has a second mortgage or credit card debts they want to consolidate should be breathing a big sigh of relief. This is a chance to bail out and lock in to the lowest rates we’ve seen in a long time.

With rates this low, we in the mortgage industry should be doing the happy dance. The phone is ringing again and those bare pipelines are starting to fill. It is great to be in another mini re-fi boom, but there are dark clouds on the horizon. Even as rates go down, mortgages are about to get more expensive for many consumers.

There is a new change in the mortgage market that will affect anyone who is looking for financing, whether for a purchase or a refinance. It is called Risk Based Financing, the idea that those borrowers with the best credit scores will be able to get mortgages at the best rates, and those with lower credit scores will have to pay more. This isn’t talking about Sub-prime loans or loans for people with bad credit. The people affected by this change are borrowers with credit scores good enough to qualify for Fannie Mae and Freddie Mac based conventional financing.

This concept has been talked about for years, but it is only now with the real estate market soft and foreclosures rising that it is going into effect. Or more to the point, it’s only going into effect now when the big mortgage players are taking it on the chin for all the bad loans they wrote when credit was easy. Freddie Mac and Fannie Mae, the 2 largest purchasers of mortgage loans, will put this in place for all loans they buy as of March 2008. This means that all the wholesale lenders will react to the change by pricing it into their rates sooner. Some already have. Chase Mortgage, one of the largest wholesale lenders changed to a risk based pricing model for loans locked last week. All the other wholesale lenders will follow suit in short order. The pricing hit will be based on the borrower’s credit score and their loan to value, that is, how much equity they have in their home. Those with lower scores and not much equity (first time home buyers?) will be hit hardest.

Risk based financing  means that good credit is more important now than ever before. If you are thinking about buying a new home soon, or if you’ve been putting off that refinance because you thought rates would drop lower, you might be surprised that things have changed. The best thing they can do is review your credit early and address any problems now. Here at Illinois Mortgage Rates and News I will have more information about credit and ways to improve it in the coming weeks.

Update - To learn more about credit and how to improve your credit scores, here is a series I put together.

Understanding the credit system

What makes up your Fico credit score

10 Ways to improve your Fico score

How to fix mistakes on your credit report and rebuild your credit

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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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