Jumbo loan lenders are hard to find these days. Sure, many lenders have jumbo programs on their rate sheets, but most of these programs are priced very unattractively.

Here in the San Francisco Bay Area, we need jumbo lenders. On the retail side, Wells Fargo, Bank of America, Union Bank, and First Republic Bank offer attractive terms.

On the wholesale side (the channel I work through), we don’t have very many choices any more. ING, First Federal Bank, and US Bank are the only lenders that we work with that have attractive programs at this point in time. I understand that LIME Financial will be offering some competitive jumbo terms shortly.

Are there any suggestions out there for jumbo lenders with attractive programs?

Most homeowners want to get their house paid off as quickly as possible. It’s in our American psyche. Not having to make a large payment, and not having to worry about losing your house because you don’t have a loan are huge emotional benefits.

I understand these emotional benefits. However, I think many people make the mistake of isolating the payoff of the mortgage as the “high and mighty” goal while downplaying other important financial objectives, not to mention the tax ramifications of paying down the mortgage.

Here is when a 15 year loan does not make sense:

- The homeowner does not feel comfortable with the mortgage payment.

- The homeowner does not have six months of income saved in a purely liquid account in case of income interruption. Life happens - having six months of liquidity for emergencies is great financial protection in case of an emergency. 

- The homeowner carries credit card debt - how much sense does it make to pay principal while paying high interest on non-deductible debt?

- The homeowner is not fully funding retirement as allowed by tax laws - a homeowner is letting the IRS whack him twice by paying principal, which reduces the interest deduction, and not taking advantage of tax advantaged accounts that they could be using.

- The homeowner does not have enough funds to pay for higher education for their children - they’ll probably wind up refinancing anyway to pay for it.

- The homeowner does not have adequate life, disability, and/or health insurance - Is it smart to leave a non-working spouse with a high payment 15 year loan without adequate insurance coverage?

Here is one another scenario where it does not make sense. Suppose you have enough liquidity set aside to pay the loan off. Why would you continue to pay a large chunk of principal each month and erode your tax benefits of the interest deduction?

Here is another example of why it does not make sense. I learned this listening to a podcast of a very wise, in my opinion, mortgage advisor named Ed Conarchy. He said something like this, “Suppose I gave you a dollar. Would you rather invest it in something that taxed you at your ordinary income rate (which for many of us is in the 25% to 40% range), or at the capital gains rate, which for long-term capital gains is 15%?”

 When you pay principal, you are reducing the amount of interest owed, therefore, you are decreasing your interest deduction, and increasing your taxable income. Are you better off taking that dollar and investing it in something that taxes you at a lower rate? I know my answer.

The point of this article is that the homeowner’s whole financial picture needs to be evaluated, hopefully with the help of competent advisors on both the asset side and liability side of the balance sheet.

As you may be aware, Freddie Mac and Fannie Mae have temporarily raised the limits for the size of a loan (called an agency jumbo loan, or conforming jumbo loan) that they will buy to $729,750 in certain high cost areas, such as San Mateo, Santa Clara, San Francisco, and Marin Counties.

What you may not be aware of are the guidelines are different for the agency jumbo loans than they are for the traditional conforming loans.

The agency jumbo loan will allow a borrower to borrow up to 90% of the sale price. Mortgage insurance is required above 80%.

Seller contributions are allowed up to 3% of the sale price. Many times borrowers use these funds to finance a buydown of the interest rate.

Let’s look at an example of a buydown scenario using today’s market rates on a listing price of $800,000. With 10% down, the loan amount would be $720,000.

Let’s assume you have a choice of reducing the price $24,000, or getting the seller to contribute $24,000 toward closing costs. Which choice is best for you, the home buyer?

Let’s look at reducing the price first. With a $776,000 sale price, 90% of $776,000 is $698,400. The rate with no points is 6.625%, and the principal and interest would be $4472. Property taxes, using 1.25% of the sale price is $808 per month. Mortgage insurance would be $303 per month. So, the total would be $5583 per month.

Now let’s assume the other scenario. The sale price will be $800,000. The seller is going to contribute $24,000 toward the closing costs. The buyer decides to use this contribution to buy down their interest rate. With a $720,000 loan amount, he will be able to obtain a fixed rate at 5.75%. The principal and interest would be $4202 per month. The property taxes would be slightly higher, $833 per month. The mortgage insurance would be slightly higher, $312 per month. The total would be $5347 per month.

I strongly believe in the buydown strategy. Although this buyer had to pay $2400 more toward his down payment, the benefits far outweigh the costs.

This buyer will save $236 per month. This savings can be used to fund something useful, such as a college or retirement fund.

Most importantly, there is a benefit most people don’t realize; although the seller pays for the buydown, the buyer gets a tax benefit although the seller made the contribution for it(I am not a licensed tax preparer - please consult with your licensed tax preparer for limitations).

In this example, if the buyer was in a 33% tax bracket, he would realize an $8000 tax savings in the year he purchased ($24,000 x .33% tax bracket in points paid to buy down the rate to 5.75%)!

The buydown of a conforming jumbo loan is a great strategy for all involved.

Buyers benefit from reduced monthly payments and tax benefits.

Sellers benefit from using a unique strategy to get their house sold.

Real estate agents benefit because if they use this strategy they will be viewed to be more knowledgable than the average agent. In addition, they will gain a reputation as being able to sell homes at a higher price, because this strategy helps the values in the neighborhood.

There has not been much change from last week in either the mortgage market or the stats in the local home sale market.

Rates have not moved much this week. That could change tomorrow when the Fed announces their decision regarding the Federal Funds Rate at 11:15 Pacific Time. I am going to go out on a limb and predict that they will not change rates - the consensus is that they will cut .25%.

 Burlingame has 54 single familyhomes for sale with 10 listed as pending - not much change from last week. The lowest priced listing is for $659,000. The highest priced listing is for $2,995,000, which is a $100,000 increase of the highest priced home for sale from last week.

Hillsborough has 55 homes for sale with 3 listed as pending sales, according to mlslistings.com. The price range is between $1,995,000 to $18,000,000. Once again, the highest priced home for sale is in the $2,000,000 price range. We’ll wait another week to see if we can draw any conclusions about what is happening in the Hillsborough home sale market.

Increased rates and tighter guidelines in the jumbo loan market have not hurt sales in Hillsborough, according to Pierre Buljan, a veteran real estate agent who specializes in selling high-end homes for Cashin Company in Burlingame.

When asked to characterize the Hillsborough market, Buljan stated, “The market is in equilibrium; buyers have taken the time to educate themselves about good value, and sellers have become more realistic about what their homes are worth.”

Buljan went on to state that the market is not fragmented. “If a home is priced right, it is selling quickly, sometimes even before it goes on the open market. It does not matter if it is $2 million or $12 million.”

What I learned from my conversation with Pierre is that jumbo loan rates and guidelines are not as important in the Hillsborough real estate marketplace as they are in other cities. The big market driver in Hillsborough is value.