(February 20, 2009)
Before the mortgage meltdown, just about anyone could get a loan with a fairly attractive rate. Lenders were offering loans from no money down to negative amortization (this is where your balance goes up, not down). Many even had programs that did not require you to prove any income documentation. All that has clearly changed over the last two years or so and home owners with jumbo loans have been trapped paying substantially higher interest rates just because their loan balance is higher then normal.
Those with jumbo mortgages are encouraged to shop around to secure the best financing available, but should be aware that not all banks offer the same programs. There are many lenders out there that really don't want to take the risk with these higher loans and are pricing them accordingly. Just today, I priced out a jumbo scenario and found out large variation of interest rates and points. Rates at more then 23 different lenders varied from 4.75% to over 8.5%. One of the same loans even required the loan to be bought down by demanding over 9 full points just to get a 7.00%.
Luckily, there are programs out there to help homeowners with jumbo loans to save substantial money on there mortgage payments with out having to pay outrageous rates and points. Homeowners with solid credit and decent equity in their homes should expect to rates to be in the low fives for their jumbo loans. Those with substantial equity built up in their loans are even being compensated by some lenders by being offered extra rate reductions.
The money saved from refinancing to a lower rate could be substantial and may end up literally saving jumbo mortgage borrowers hundreds of thousands of dollars over the life of their loans. These savings are really amazing and many pay for themselves in just a few months or less.
Over the last 24 months, program guidelines on all loans have become continuously more restrictive. With all the bail outs happening there has not been much attention to the jumbo mortgage area, which really has been neglected. It is hard to say whether there will even be any improvements for jumbo mortgage holders but one thing they do need to pay most attention to is the growing demand for increased equity requirements by lenders. This has become extremely difficult for borrowers with the recent declines in home values in the upper scale housing markets.
In some cases, borrowers are being asked to pay down their loans before lenders will even close them. This could tie up cash reserves in a bad economy and may not be the best thing for those without stable income or for self employed business owners. This could be a limiting factor for some and may not be so bad for others.
Let's compare two hypothetical borrowers:
Borrower A has their own distribution business and his business may require him to have plenty of money liquid to pay expenses or float the business while waiting for revenue from clients. Being with out surplus cash reserves to save thousands on their mortgage may not be the best use of their money, especially when their business, family and house are on the line if something goes wrong.
Borrower B is the Vice President of a growing medical care facility for seniors and has a very high income. He has some money on the side but not enough to pay down his mortgage enough to qualify for his loan. Borrower B, with the high salary and stable employment, may borrow money from his 401K and use some of his current savings to pay down his principle to qualify for the refinance. Since he will be skipping at least one mortgage payment, he will then have a lower loan balance and will also be drastically reducing his monthly mortgage payments. This in turn will enable the borrower to reestablish his cash position and pay the loan back to his 401K without really changing his regular contributions and end up saving him several hundreds of thousands of dollars over the life of his loan.
As you can see it can be very advantageous for some borrowers to make a substantial investment in their home because in time, this investment will by far pay for itself. Another option for those who are coming up with a substantial principle payment can opt for an interest only mortgage. This does two things. First allows the borrower to save as much money as possible on their payment since they just pulled out a large portion of their savings and gives them the chance to rebuild. The second benefit for those who opt for the interest only mortgage is to maintain the maximum allowable income tax deduction on their mortgage. This works good for some, because they have just made a large principle payment and now have the chance to build their savings back up or pay down other debt.
The biggest pitfall borrower's face is that home prices may continue their decline and homeowners may not be given this chance again. While it is possible for some relief to come into the market, but it is highly unlikely to come into the jumbo market sector. That being said, this is a good time to take advantage of these new low rates for jumbo mortgages review your finances. If rates or programs do get better, you can always take advantage of them when they come out. If they don't, you could be left kicking yourself for not jumping when the opportunity presented itself and may find it nearly impossible to refinance down the road.
In conclusion, the rates are the lowest they have been in years for jumbo mortgages and it is important to take advantage of these low rates while they last. Just this week, one of the lenders offering the government sponsored FHA streamline refinance for borrowers with low credit scores just went out of business. Unfortunately, we had to tell some borrowers they could not be helped because the program no longer existed. It is also most important that the refinance makes sense for your personal position and will save you a substantial amount of money.
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