Jumbo mortgages for luxury property
Jumbo is back in style, and I don’t mean Jumbo the elephant or jumbo jets. What I do mean are jumbo mortgages that are making a comeback in spite of our tepid housing recovery.
A jumbo mortgage, for those of us who never had to inquire about such things, is a mortgage in an amount above conventional conforming loan limits. The conforming loan limits are set by the two government sponsored enterprises Fannie Mae and Freddie Mac, which set the limit on the maximum value of any individual mortgage they will purchase from a lender. The current Fannie Mae/Freddie Mac limit is $417,000, which means that in most of the country, private market financing is needed for loans in excess of this. There is a higher government cutoff point in certain high cost areas.
Since jumbo mortgages are generally a higher risk to the lender, especially since these loans are too big to be sold to Fannie Mae and Freddie Mac, the interest rates are higher as well. The current rates are anywhere between a half to a full point higher, but at today's extremely low interest rates, which are expected to remain low, they can still be attractive loans. Because these loans are kept on their own books, the lenders incur all of the losses if there is a default, therefore, requiring a higher qualifying level in a market that is already requiring stiffer qualifying guidelines.
Bank of America, Wells Fargo and Citigroup are just some of the large banks that are not only willing but happy to provide jumbo loans. These luxury property buyers are required to have top notch credit scores of at least 720 and provide down payments between 25 percent to 40 percent, based on the amount being financed. Because of high credit scores and high cash down payments, the lenders feel relatively secure that these loans will not default.
Incredibly, luxury properties are recovering faster than other price points, and private market jumbo loan lenders are reporting that this market represents about 15 percent of the total dollar amount of mortgages they are processing. In all, lenders doled out $38 billion in private jumbo mortgages during the second quarter of 2012, which is up 65 percent from last year.
However, jumbo mortgages may not be the right choice for all luxury buyers even if they qualify. A lot of potential buyers are sitting on large amounts of cash and could decide to use it to get them into the range where they will qualify for a conventional lower rate mortgage at a more attractive rate. For some buyers, this is a good middle ground, saving them thousands in interest payments over the life of the mortgage while still giving them the advantage of a large tax deduction. At the present time, taxpayers can usually deduct interest payments on a total of up to $1 million of mortgage debt.
If you do decide on a jumbo mortgage, it’s important to shop around and get advice from a mortgage lender or broker who specializes in this area of home financing. Requirements can vary greatly from lender to lender as do down payment amounts, other outstanding debit levels and total assets.
Let’s hope the availability of jumbo mortgages attracts jumbo buyers and a jumbo housing recovery that will live for 24 years, just like Jumbo the Elephant.