In the wake of the credit crisis, the rich were no different from everyone else.
Getting a mortgage “was tough for everyone,” remembers Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington, D.C.
Now, more lenders are giving the nod to those who can afford large – known as “jumbo”– mortgages, and that’s good news for all of us.
Jumbo loans are loans worth more than $417,000 (higher limits exist in costly housing areas) and they do not qualify for government-backed financing.
Growth in the number of jumbo loans reflects “a healthier housing market and more confident lenders,” says Tony Caruso, mortgage loan officer for PNC Wealth Management.
By holding these loans, lenders show confidence that the price of the home they’re financing won’t tank. They anticipate that borrowers will make timely payments, indicating more confidence in economic conditions.
But lots of jumbo borrowers don’t consider themselves rich and aren’t buying luxury homes, says Veronica Larrea, vice president of operations for Century 21 Allstars in Pico Rivera, Calif. In some parts of Los Angeles County, for instance, she notes that many relatively humble three-bedroom homes are pricey enough that borrowers seek a jumbo loan.
Moreover, some “are buying duplexes, because they want the rental income [from the extra unit] to afford the loan,” Larrea adds.
Still, the greater availability of jumbo loans is spurring growth in the luxury home market. According to statistics from the National Association of Realtors, sales of homes priced between $750,000 and $1 million rose by 53 percent from October 2011 to the end of October 2012.
Here, a look at how borrowers are getting these jumbo loans, which represent a growing force in the market:
Small Banks Lend Big
Although the large lending institutions like Wells Fargo and Bank of America make jumbo mortgages, borrowers should “not to rule out” small local banks or credit unions, according to Guy Cecala, publisher of Inside Mortgage Finance, a trade publication.
Since jumbo loans are not sold off to government agencies, the lenders make their own rules on rates and terms, based upon the amount of down payment and the credit-worthiness of the borrower.
There probably won’t be dramatic differences in rates and terms, but it may pay to compare small and larger loan sources, Cecala says. Jumbo loans typically carry a higher rate – experts expect one-quarter to three-eights of a percentage point higher – than smaller loans. Shaving just a bit off the rate can translate into a significantly lower monthly payments, given the bigger mortgage.
Wealthy Choose Differently
Wealthy borrowers often take a holistic look at their holdings in order to decide how much to borrow, Caruso says. For instance, lower loan rates are often offered for high down payments.
Caruso says borrowers may consult with a financial planner in order to decide whether it’s worth withdrawing more of their savings to increase a down payment.
ARMs Find Favor
With record-low interest rates, most borrowers are reluctant to take out “adjustable rate mortgages” or ARMs, because while the initial rate is slightly lower, there is a good possibility the rate will jump, Cecala says.
But some jumbo borrowers are taking ARMs , pushing down the rate initially, with plans to move or pay off the loan when the rate adjusts.
However, even the wealthy should not gamble with holding a loan that could get more expensive, says Irene Giman, a Marlton, N.J., financial planner. Here again, the rich are no different.
“No one knows what the future will bring, and you don’t want to be forced to pay off a loan,” she says.