Securing jumbo loans for your jumbo house
As house prices in New York have accelerated the past few years, the market for high-end mortgages has grown considerably. The reason: median selling prices of homes in the Big Apple reached $925,000 in 2006. Under Freddie Mac and Freddie Mae rules, the maximum conforming mortgage available is $417,000. Unless you are prepared to make a down payment greater than 50 percent of the purchase price, you’ll need to obtain a non-conforming mortgage, sometimes referred to as a “jumbo” mortgage.
The application process for a high-end mortgage is the same as a conforming one with a couple notable exceptions, the most important being the approval process. Because jumbo mortgages aren’t eligible investments for government-sponsored enterprises like Freddie Mac and Fannie Mae, lenders take on additional risk with this type of loan and consequently apply a more stringent credit standard. A further difference is the interest rate charged. Because it’s a non-conforming loan, the rate is usually one-quarter to one-half a percent above what the conventional rate would be.
As a homebuyer in search of a high-end mortgage, you most likely have a complex financial situation. Your cash flow may change from minute to minute and your mortgage should reflect this. Flexibility of terms is essential. A popular option today is the adjustable rate mortgage (ARM), which gives you four payment choices including:
- Minimum Payment
Option ARMs are offered with one-, three- or six-month introductory rates between 1 and 4 percent. After the initial period, the fully indexed rate (based on the 12-month Monthly Treasury Average) adjusts monthly. This option allows you to defer interest up to 110% of the original loan value.
- Interest Only Payment
This allows you to pay interest only for the first five or 10 years of the mortgage term. It’s an excellent way to free up money for other investments, etc. However, be aware that the monthly payments will rise considerably at the end of the interest only period. This is because the mortgage re-amortizes over the remaining term and payments will include principal as well as interest.
- Fully Amortizing 30-Year Payment
With this option, you pay principal and interest over 30 years with the fully indexed rate adjusted monthly.
- Fully Amortizing 15-Year Payment
Your monthly payments are higher than above because you repay the mortgage in half the time.
The option ARM is not for everyone. If you are planning to live in your home long-term, it probably makes more sense to go with a 15- or 30-year fixed rate mortgage because it provides cost certainty. Interest rates are still historically fairly low and locking in wouldn’t be the worst decision. Interesting note: 85 percent of high-end mortgages are ARMs while the opposite is true for conventional ones.
Another recent trend in the high-end market is the reverse jumbo mortgage. Homeowners who are older than 62 and wish to withdraw some of the equity from their home for whatever purpose they choose can generally do so without any income qualifiers or monthly payments. Further, the funds received are not taxable as they are loan advances and not income. When you sell your house, you simply repay the loan including any interest payable.
Real estate prices on both coasts have risen dramatically. It’s no secret that the past few years have seen the cost of owning a luxury home in either location skyrocket. Three thousand square feet in San Francisco is definitely pricier than the same space in St. Louis. A conforming mortgage in Missouri becomes a jumbo or even super jumbo in California. There’s no mystery as to why publications that chronicle the country’s best places to live use real estate prices as a major criterion in their ratings.
One of the biggest areas of demand for high-end mortgages is the vacation home. As many 50- and 60-year-old boomers have sought to escape to weekend properties around the country, especially those in popular resort areas, prices of second homes have outstripped those of some primary residences. While buyers’ incomes have risen, the cost of resort properties has increased more so, creating a new and untapped market for high-end mortgages.
Today’s luxury home buyer has more choices than ever before.