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?

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.

According to this article, Wachovia Corp. will be waiving the pre-payment penalty for clients who have an option ARM loan.

Will this move be duplicated by other option ARM lenders, such as Washington Mutual, Downey Savings, Chevy Chase Bank, and Countrywide? Stay tuned.

Ironically, the rates on many of these option ARM loans are going down, and will probably continue to go down for awhile.

Although the rates may continue to go down on these loans, I think it would be wise for homeowners with this type of loan to check out other options. Property values in the future are a concern of mine. If a homeowner waits to refinance because their rate is attractive now, they may not be able to refinance later because their property value may be lower. It would be wise for these homeowners to contact a competent mortgage advisor to find out what their options are right now. 

It’s pretty easy to be lulled to sleep by your option ARM loan. You probably know the rate is adjustable, but you don’t pay too much attention because you also probably know the minimum payment only changes once per year.

Wake up! You need to know several important components of your option ARM. There may be a reason to explore refinancing sooner rather than later.

The first thing you need to check is the date your loan started. The easiest way to find this out is to check with your mortgage advisor. If he is a good one, he will have this info on his database.

The date of inception is important because, generally speaking, the lender will re-cast the payment at the end of each five year increment of the loan. Re-casting means re-calculating the payment (usually it is a very large increase) in order to pay off the loan by the end of the term of the loan.

As an example, suppose you obtained a 30 year option ARM loan in August 2003. Guess what? You are going to receive a letter in the mail shortly stating that the payment has been re-amortized to a 25 year loan based on the current interest rate and the outstanding balance. Ouch!

A second component of your option ARM mortgage you need to know about is the maximum balance allowed. Generally speaking, lenders will allow the outstanding balance to increase anywhere from 5% to 25% of the original balance. For example, if you obtained a $500,000 loan with a maximum balance of 110% of the original balance, the maximum the loan can increase to is $550,000.

If it reaches the maximum, the lender will re-cast your payment to have the loan paid off by the end of the loan term. You need to know how much you can allow the balance to increase, rather than being surprised by a letter from your friendly lender informing you of their decision to raise your payment.

The last thing you need to know is about interest rate trends. If you are not near the end of a five year period, and if you are not near the maximum balance allowed, then your decision whether to refinance or not should be determined more by the direction of interest rates.

There is an excellent website, MoneyCafe, that gives graphs and charts of the most commonly used indexes for option ARM mortgages. If you look at this website, and consult with your mortgage advisor, you can make a pretty good guess of the direction of your option ARM mortgage rate. Use this information to determine if you should stay put or pursue another opportunity!

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.

Freddie Mac and Fannie Mae have been offering to buy loans that used to be considered “jumbo” from lenders for loan amounts up to $729,750 since the economic stimulus package was signed.

Until now, the program has been a flop. The rates offered were very unattractive.

Finally, they have decided to reduce the rates on these “agency jumbo” loans. Coupled with the overall decrease in market interest rates this week, they finally are worth taking a look at.

Today, the rates are about the same as they were yesterday.

I am advising my clients to get their documentation together now before the massed flood the lenders with applications because I am anticipating a slowdown in the processing. A slowdown could mean that the rates may not be as good for the people in the back of the line as they are for the people in the front.

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.

There is plenty of information being disseminated as to why jumbo mortgage rates have increased recently. What hasn’t been discussed as much is that there are some lenders who are offering attractive jumbo rates - you just need to do a little work to find them.

If you think rates are going to stay low for a while, Suntrust Mortgage is offering very attractive adjustable jumbo rates. For example, today they are offering a wholesale base rate of 4.625% on a 6 month adjustable with a rebate of .215% to the broker (there may be other charges on top of this - consult with your local broker). Interest-only payments and stated income documentation are offered also.

If your time horizon for your loan is longer, ING Mortgage is offering a jumbo adjustable rate with the first 5 years fixed at 4.875% with a base cost of 1.625 points (again, the broker will add on his fee on top of this cost). Interest-only payments are available, and you do not have to disclose your liquid assets!

If you need to borrow a lot of money (up to $5 million), First Federal Bank has some attractive options. They are offering a jumbo adjustable rate with the first 5 years fixed at 5.15% with a base cost of 1.125 points plus the broker fee. A 3 year pre-payment penalty is required, but they have other terms with a shorter pre-payment term, or no pre-payment penalty at all. For you borrowers with super jumbo rate needs, this could be the lender for you.

 Again, there are attractive jumbo rates available. Contact a competent mortgage broker to help you find the best program.

As we move into 2008 and going forward, many homeowners will be having their interest rate resetting. Between 2002 and 2004, huge numbers of homeowners chose to finance their homes with intermediate ARMs that had the rate fixed for 3, 5, 7, or 10 years.

 The rates during this time period were incredibly low. For example, some of my clients obtained 5 year fixed rates at 3.875%!

If your rate is going to reset, you are probably facing three components of your loan that will make your payment go up, perhaps to an extremely uncomfortable level.

The first component is the general level of interest rates. They are higher! No mystery here.

The second component is that you may be asked to pay principal and interest. Many homeowners have gotten used to paying interest-only.

The third component is the amortization of the loan. If you have a 5 year fixed that had a 30 year loan term, you will now have a 25 year amortization.

So, we have higher interest rates, principal and interest payments, and a shorter amortization period. Ouch!

Let’s look at a typical example from 2003. 5 year fixed, 5% interest rate, interest-only payments, and a $700,000 loan amount. The payment is $2916 per month.

Now, the rate is resetting. The lender sends you a letter stating that you now have an adjustable rate based on the 1 year LIBOR index with a 2.75% margin. Let’s call this rate 7.25%. Your new payment is $5060 per month - a 73.5% increase!

You would really be uncomfortable with this payment. What can you do?

You can contact your current lender. They may work with you to modify the terms of your note.

Another option is to refinance. In my next post I will give you some ideas on how to structure your loan so that you not only avoid the reset payment, but may even be able to reduce your payment from what you are paying now!