Many homeowners who buy homes with high property values, and can afford to make larger monthly mortgage payments, usually take on nonconforming or jumbo loans.
A jumbo loan refers to mortgage financing for loan amounts higher than the maximum conforming limits established by Freddie Mac and Fannie Mae. Mortgage lenders also have blended jumbo loan products, which combines a home loan and home equity line of credit.
These loans provide borrowers greater payment flexibility and are available for home purchase and mortgage refinance. Borrowers can also complete applications for cash out refinances.
On October 1, 2011 the mortgage loan limits for the higher priced housing markets in the country were reduced. In the majority of U.S. counties, any mortgage that exceeds $417,000 is considered a jumbo loan. In metropolitan areas with higher home prices, jumbo loans start at $625,501. Generally, jumbo loans have higher interest rates than smaller conforming loans.
Jumbo loan demand rising
According to the trade publication Inside Mortgage Finance, lenders completed $38 billion in private jumbo mortgage applications during the second quarter last year. This represented a 65% year over year increase above 2011 and the highest quarterly dollar volume since the first quarter of 2008.
Jumbo loans are not eligible for purchase by the government-sponsored enterprises Freddie Mac and Fannie Mae. Consequently, jumbo loans have a higher interest rate.
The increase in luxury home sales exploded at the end of 2012. Many wealth homeowners sold their home in 2012, as oppose to selling in 2013, to avoid uncertainty regarding the fiscal cliff and the possibility of higher tax rates.
Refinancing jumbo loans
Similar to the pattern in the conforming loan market, private jumbo mortgages have become more affordable because of historic low interest rate levels. Last year at this time, the average rate on a 30-year jumbo mortgage was 4.39 for the week ending March 9 compared to the current rate of 3.90 percent.
Many of luxury homeowners refinanced their jumbo loans to take advantage of low interest rates and rising home values. The increase in home equity also helps more home owners qualify for a mortgage refinance.
Compare rates and evaluate closing expenses
In 2009, a few large mortgage lenders dominated the jumble mortgage market. However, more lenders have come into the market, thereby making more loan products, such as interest-only loans available to borrowers. Most lenders and credit unions now offer jumbo mortgages--so it pays to shop around. The terms will vary from lender to lender.
Before completing a refinance application, borrowers need to evaluate closing costs to ensure that they can actually save money on mortgage interest payments when they refinance. According to the Federal Reserve Board, closing costs can run about much as 2% of the mortgage amount.
Homeowners need to make sure that they can recoup the closing costs and refinancing fees before selling their home.
Some lenders offer no-cost refinancing. Other mortgage lenders will waive closing costs in exchange for the borrower paying a slightly higher interest rate. This can be a good option if you can receive a lower interest rate and mortgage payment compared to what you are currently paying.
Cash-in refinancing strategy
Some borrowers who have the extra cash are refinancing their jumbo loans into conforming loans. Depending on the location, and the maximum limits--$417,000 or $625,500, borrowers may have to put in extra cash of $100,000 or more into the transaction to get below limits and qualify for conforming loans with even lower interest rates.
Bob Moulton, the president of the and Americana Mortgage Group (Manhasset, N.Y.), believe that it makes financial sense for homeowners who are “cash heavy” and interested in reducing their monthly payments while enhancing cash flow.