About one out of every five loans approved in today’s market is a jumbo loan. Depending upon the location of the property, most jumbo loans are those that are above the conforming loan limit of $417,000 and can be found in both fixed rate and adjustable rate programs in the form of a hybrid. Fixed rates are typically offered in either 15 or 30 year terms while adjustable programs are of the hybrid version, where the initial rate is fixed for a predetermined period of time before turning into an adjustable rate that can change once per year. So, which is better for you when financing a home requiring jumbo financing, a fixed or the hybrid ARM?
Adjustable rate programs are often the choice when current fixed rates are at relative highs .Over the past decade however, fixed rates have been on the low cycle and don’t appear to be moving upward with any aggressive tone for the foreseeable future. Typically, the advice is to select the hybrid loan if you don’t intend to keep the mortgage for very long.
Jumbo hybrids have the initial fixed rate, an adjustment cap and a lifetime cap and can be found in a 3/1, 5/1, 7/1 and 10/1 option. The initial digit indicates how long the starting rate is fixed and the second digit is when the rate can adjust, in this example, the rate can adjust once per year. Shorter initial fixed periods will have lower rates than longer ones. A 3/1 has a lower start rate than a 10/1 for example. The most popular choice in the hybrid category is the 5/1.
Taking the 5/1 ARM as an example, the initial rate is for five years and is typically about 0.50%-0.75% lower than a 30 year fixed rate jumbo loan. As the end of five years approaches, the lender adds the index in which the loan is based and adds a margin. The common index for jumbo hybrid loans is the London Interbank Offered Rate, or LIBOR and a common margin might be 2.25. If for example, the LIBOR index was 1.25 and the margin 2.25, the new rate for the upcoming year would conv-ert to 1.25+2.25=3.75%.
The borrower is protected by wild index swings by rate caps both for the initial adjustment, annual cap and lifetime cap. Let’s say a jumbo hybrid has an initial cap rate of 2.0%, an annual rate of 2.0% and a 5.00% lifetime cap and the start rate was 3.50%. At the end of five years approaches, the lender sees the current LIBOR is at 6.00%. Adding the margin of 2.25% the new rate would jump from 3.50% to 8.25%. That much of a change could mean the borrowers could no longer afford the mortgage. Instead, the lender caps the initial increase at only 2.00% over the initial 3.50% rate, for a new rate of 5.50%. Each year, the new rate could be no higher or lower than 2.00% of the previous rate and can be no greater than 5.00% over the start rate of 3.50%. That’s a lot of math perhaps but jumbo hybrids, while offering lower start rates also have internal consumer protections built in.
Okay, which is better, a hybrid or a fixed? For those who are relatively certain they’re going to keep the property well into the future and fixed rates are still competitive, a 15 or 30 year fixed rate loan is probably the better choice. Even if the borrowers aren’t that certain of a future move, the prudent choice would still be the fixed rate.
Conversely, if borrowers know they’ll either sell the property or refinance at some point in the near future, say five or seven years, then the hybrid can save borrowers thousands of dollars over the longer term.
Jumbo Mortgage Source is leading information resource serving home buyers nationwide: including Chicago, Miami, Los Angeles, Seattle, Dallas, Boston. Call us with any questions at ph: 800-962-0677 or visit www.JumboMortgageSource.com for more information. Be sure to learn more about latest 95% financing options with no PMI.