Jumbo Mortgage Loans
Mortgage loans that are considered jumbo loans are those that exceed the limits that have been set by the government sponsored agencies, Fannie Mae and Freddie Mac. The Housing and Economic Recovery Act of 2008 changed Fannie Mae’s charter to expand the definition of a conforming mortgage loan. According to provisions of the Housing and Economic Recovery Act of 2008 (HERA), the national loan limit for mortgage loans to be securitized or purchased by the government agencies of FNMA and FHLMC is set based on changes in average home prices over the previous year, but cannot decline from year to year.
Fannie Mae and Freddie Mac each year set the limit on what constitutes a conforming loan, based on the October-to-October changes in mean home price following the terms set by The Federal Housing Finance Agency (FHFA). The Federal Housing Finance Agency (FHFA) has announced that the conforming loan limit will remain $417,000 for 2009 for most areas in the U.S. but specified higher limits in certain cities and counties. The conforming loan limit is the maximum size of loans that Fannie Mae and Freddie Mac can purchase in 2009. The high cost areas are determined by the Federal Housing Finance Agency.
Every year the limit is reset to a new number in the month of January, while the numbers are constantly changing on a yearly basis, one of the most recent updates disclosed that the maximum loan amount is $417,000 for condominiums and single-family homes. Once your loan has exceeded this pre-set limit, you are no longer applying for a standard loan or conforming loan, but rather, you have moved into the jumbo loan category. The 2009 general conforming mortgage loan limits are identical to the 2006, 2007, and 2008 conforming mortgage loan limits.
The reason why some people need a larger home loan does not always mean they are seeking out the biggest and most expensive houses to live in. There are some parts of the country where starter homes can cost more than $500,000. The person who would choose to purchase these more expensive homes may find that a standard, conforming loan will not be sufficient. The mortgage loan often needed to buy these higher priced homes is called a jumbo loan. Jumbo loan applications have risen measurable in recent years due to the rapid increase in housing prices.
Typically there is a slightly higher mortgage rate associated with jumbo loans. Sometimes the definition of higher mortgage rate can be staggering; anywhere from a mortgage rate that is ¼% higher to 1% higher than conforming sized home loans. This is because both Fannie Mae and Freddie Mac only buy mortgage loans that are conforming loan size, to repackage into the secondary market, making the demand for a non-conforming loans or jumbo loans much less. Since these mortgage loans are not securitized by Fannie Mae or Freddie Mac, the less liquid market for jumbo loans leads to a somewhat less uniform set of standards.
Jumbo mortgage loans have many of the same options and attributes that are available on conforming loans. They will however, all have some restrictions. The variety of home loan types is not usually as vast with jumbo mortgage loans but you will certainly find 30 year fixed rate jumbo loans, 15 year fixed rate jumbo loans, adjustable rate jumbo mortgages, and a host of hybrid mortgage loan types. All of these jumbo loan programs will feature slightly higher mortgage rates than if they were compared to national averages. The higher mortgage rates apply to both purchase transactions as well as refinances.
The qualifying requirements for jumbo home loans will also be more stringent. Required credit scores will be higher. Down payment requirements will more restrictive leading to larger down payments and lower loan to values. Financial reserves or funds that are available after the mortgage loan closing costs and down payment will need to be more substantial.
This not to say that jumbo home loans will have extremely high interest rates or a thicket of qualification requirements. It is simply that jumbo home loans have discernibly higher requirements and theta a jumbo home loan borrower should be prepared that in order to borrow much more than the standard mortgage loan borrower they will have a somewhat higher burden during the mortgage underwriting process.
When shopping and comparing jumbo loans, a prospective borrower will want to research and compare as many mortgage lenders as possible and be sure to ask about the jumbo loan mortgage rates to avoid obtaining inaccurate information. There is no point in searching for the mortgage rate and qualifying requirements on a 30 year fixed rate loan only to find out that the information you receive is for a conforming loan amount.
While these mortgage rates on jumbo loans are higher than others, once you look at all of the payment options and how this interest is distributed throughout the life of the loan, you will be able to find the home loan that fits your financial situation best. Just because you have to use a jumbo loan doesn’t mean that you have to pay a jumbo monthly mortgage payment.
Draw on the mortgage calculator to help calculate the monthly payments differences between the varying jumbo loan terms as well as the rate difference between a conforming loan and a jumbo loan to thoroughly evaluate all options. A good source for mortgage calculators can be found at www.selectcalculators.com.
Mortgage Buydowns
A buydown is a mortgage loan with a below market mortgage rate for a period of time that usually lasts one to three years. The buydown is a temporary reduction in the mortgage interest rate on the home loan that is paid for by paying additional points at the time of the mortgage loan closing. The buydown mortgage loan is created by having the homebuyer or another third party, often the seller or a home builder, making a subsidizing payment to the mortgage lender so that the buyer’s mortgage rate and, therefore, monthly mortgage payment are lowered. The buyer may incur the costs of the additional points or subsidy or the seller may foot the bill for the additional points or the mortgage lender can structure the buy down and fund its with a higher mortgage rate immediately preceding the buy down period over the life of the loan.
A mortgage buy down is a more popular home loan product used by builders in large subdivisions and by sellers in a slow sales market. A borrower may want to buy down mortgage rates because they have cash on hand, expect their earnings to go up, but need a lower monthly mortgage payment in the present. The monthly mortgage payment during the buydown is a fully amortizing principal and interest mortgage payment.
In a mortgage buydown, buyers are essentially paying cash up-front for points, and receiving a reduced mortgage interest rate in return. However, the buy down is only a temporary reduction in the mortgage rate. Typically, mortgage buydowns last from one to three years after the home loan is closed. Each year the mortgage rate will rise by a predetermined amount and the mortgage rate increases will only occur for the two or three years, depending on the type of mortgage buy down.
Each point equals one percent of your total loan amount. For example, 2 points on a $ 100,000 loan will cost $ 2,000, or 2% of the loan amount. The more mortgage points paid for the subsidy, the lower the interest rate will be. If these points can be paid for by the seller as an inducement for the seller to close the transaction, this can be a valuable tool. The mortgage lender may fund or structure the buydown by charging a higher interest rate over the life is loan, this is not very common as the mortgage lender has to protect against early payoff since their compensation for the lower initial mortgage rate is a higher than market rate in the later years of the mortgage loan.
For some borrowers a mortgage rate buydown is more advantageous than choosing an adjustable loan with a payment option that allows for negative amortization like an Option ARM. That’s because with mortgage buydown programs your mortgage payment always includes principal and interest. This means every time you make a payment your mortgage balance grows smaller instead of bigger. The prospect of experiencing negative amortization is always a must to avoid. In addition, the mortgage rate increases for a buy down are predetermined and not market influenced once the mortgage loan is signed.
A typical mortgage rate buydown looks like this:
Payments are reduced and figured on a mortgage rate over a specific term of a few years. The difference between the real interest rate and the lowered interest rate is paid in cash by the seller or sometimes the buyer. It’s like putting $1200 in the bank and withdrawing $100 every month for 12 months to help make your mortgage payment.
One popular buydown is called the 2-1 mortgage buydown. This is a 30-year fully amortized mortgage where the interest rate increases 1% every year for the first two years, at which point the interest rate is fixed for the remaining home loan term.
As an example, consider that your mortgage amount is $350,000 and the interest rate is fixed at 6.75% for 30 years. The buyer or seller will buy down the mortgage interest rate by paying a lump sum.
Here is how the mortgage interest rate would work out over the term of the loan.
First year mortgage interest rate is 4.75%
Second year mortgage interest rate is 5.75%
Years three through 30, the mortgage interest rate is 6.75%
It keeps payments low for 36 months for borrowers whose income is expected to later increase or intend to change the home loan or ownership in the future. The borrower qualifies for this home loan at the 4.75% interest rate and payment amount.
The 3-2-1 buydown mortgage is another version of a 30 year mortgage rate buydown. The interest rate increases 1% every year for the first three years, and then the interest rate is fixed for the remaining term.
These home loans are most advantageous when the seller pays for the buy down. The most common transactions where the buy down is used are on new homes or new construction. In these cases, the builder is willing to pay points to induce the buyer with lower monthly mortgage payments and a lower mortgage rate. Home builders generally prefer to provide incentives to prospective borrowers rather than make absolute reductions in the price of the home.
The bottom line on these mortgage products is that with the buy down you are able to drop the mortgage rate and monthly mortgage payment on your home loan without incurring the risks associated with of an adjustable rate mortgage or interest only home loan.