Mortgage Rates for Jumbo Loans. Rates based on a $1,000,000 loan amount.

5/1 ARM      6.125%

7/1 ARM      6.375%

These rates are with a 1 point cost. Other options are available. These quotes assume a purchase transaction with 20% down,  full income and asset documentation, a 680 credit score, and a 30 day rate lock.

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.

Negative Amortization adjustable mortgages are looked at as if they are inherently evil in the current economic situation we find ourselves in. However, if you look beyond the surface, a case can be made that this type of  mortgage will be a good bet for the foreseeable future.

Lenders that offer this type of loan often base the rate on the Twelve Month Treasury Average index. This index is a rolling average of the monthly average of the One Year Treasury Bill. As each month goes by, the rate for the oldest month in the average drops out, and the rate for the newest month is added.

Currently, the Twelve Month Treasury Average is at 4.076%. The current yield on the One Year Treasury Bill is 1.33%. What does this mean?

You are right - the Twelve Month Treasury Average Index rate is going down. If you can get a low margin, you are going to have a pretty good rate compared to what else is being offered in the mortgage marketplace.

Of course, discipline is required for this type of loan. I recommend either making the interest-only payment, or saving the difference between the minimum payment and the interest-only payment in a safe side account with a compounding return that outpaces the negative amortization accrued.

 Before you make your next jumbo loan choice, ask your mortgage advisor about a negative amortization loan.

In my last post I stated that there are some strategies to help you avoid the pain of the reset interest rate and payment of your current jumbo loan.

The first strategy is to choose an interest-only loan. No mystery here, the payment would be less than if you had to pay principal and interest at the same given rate.

Here’s a strategy that I know many of you have not utilized lately - pay points! By paying points, you buy down the interest rate.  Combine an interest-only loan with paying points means a lower payment because the rate is lower than if you had paid no points. In addition, paying principal is optional, so that lowers your payment also.

Finally, here is a strategy that many do not know about - a temporary rate buydown.

 Here is how a temporary rate buydown works. Suppose a 30 year fixed rate is at 6.50%. You can make the rate 3.5% in the first year, 4.5% in the second year, 5.5% in the third year, and 6.5% in the fourth through 30th year.

 The lender will allow this by setting up a buydown fund when you close escrow. With this interest rate you would have to fund 4.44% of the loan amount to set up the buydown fund. Typically these funds come from the equity you have in the property.

These funds are used to subsidize the discounted payment. Each month the lender pulls the funds from this account, and the amount in the account is reduced.

 Why, you ask, would you pay 4.44% upfront to do this?

 You would do this because you need to keep the payment low so that you can keep your house. There may be no other way for you to afford the payments.

Another reason why you would do it is this: any unused buydown funds are credited back toward your principal balance if you pay the loan off.

Let’s say rates come down and you decide to refinance again. Suppose 50% of the buydown funds have not been used to subsidize your lower payments. These funds would come back to you in the form of principal reduction!

 The buydown funds are different than most loan costs because you can get the unused portion back if you pay your loan off. Not many people know about this strategy. Now that you do, you can help your family and friends ease the interest rate reset pain!