Taming the Jumbo Mortgage

Everyone knows the jumbo loan market has been out of whack for nearly 18 months. “jumbo” loans, those amounting to more than $417,000, took it on the chin when mortgage investors stopped buying subprime and alternative loans. For that reason, jumbo rates can be as much as 1.50 percent higher than conforming rates. Historically, jumbo rates were only about a quarter of a percent higher than a conforming rate, but this new spread has kept many out of the housing market: especially those that I call, “just jumbo.”

So what exactly is “just jumbo?” It’s a loan amount that just exceeds the conforming limit of $417,000 and typically reflects a sales price in the $500,000­­–$600,000 range. Many local markets offer homes in this price category, but the marked difference in rate from conforming to jumbo is slowing down sales. What is the difference in payment between a conforming loan at 6 percent and a jumbo loan at 7.50 percent? On a $500,000 jumbo loan, mortgage payments jump from $2,997 to $3,496 a month. That’s almost $500 more!

Fortunately, with some changes in strategy, we can put a major dent in that increase in payment by buying a property with two loans — a first mortgage and a second. With the first mortgage at or below the conforming limit, the second mortgage then eliminates the need for private mortgage insurance, or PMI. And still, with only 10 percent down on a $500,000 sale.

For example, let’s say we have a sales price of $500,000 and you put 10 percent down. With a jumbo loan at 7.50 percent, the monthly payment on a 30-year note is $3,146 plus a PMI payment of about $188, for a total of $3,334. Using a 40 percent debt ratio means that you need to make about $9,700 per month to qualify.

Now, let’s make the first mortgage for $400,000 at 6 percent (conforming) with a second mortgage at 7 percent on a $50,000, 30-year note. The mortgage payments would be $2,398 and $332 respectively, for a combined total of $2,730. That’s a savings of over $600 per month, and now the income to qualify is almost $1,500 less at $8,200 per month! Do you think that has an impact on affordabilty? I do.

Here’s another idea: sellers can carry back that second note to provide some additional income, providing an even better second rate for the buyer!