Interest rates on jumbo mortgages jumped about 3/4 percent in mid-August. Before settling for higher rates or giving up altogether, consider the following ways you might lower your financing costs.
Even though jumbos increased in price, conforming rates — for mortgage amounts up to $417,000 — decreased. On Aug. 20, for example, it was possible to find a 30-year fixed-rate conforming mortgage for 6.25 percent and one point. At the same time, jumbo mortgages over $417,000 were going for 7.25 percent and one point.
“Points” is a term lenders use for a mortgage origination fee that’s paid by the borrower one time only at closing. One point equals 1 percent of the loan amount. By paying more points upfront, a borrower can lower the mortgage interest rate for the term of the loan.
Points are tax-deductible on purchase mortgages in the year of purchase for those borrowers who itemize deductions. Restrictions apply, so be sure to check with your tax advisor to see if paying points will lower your overall cost of financing. Usually, the longer you plan to keep paying on the mortgage, the more worthwhile it is to pay points for a lower rate.
HOUSE HUNTING TIP: Buyers who don’t have the extra cash to pay points could ask the seller to pay points for them. Most lenders permit a seller to credit cash to buyers at closing for their nonrecurring closing costs. Points are a nonrecurring closing cost — they are paid once at closing, unlike mortgage payments or homeowners insurance that is paid for on an ongoing basis.
Lenders have limits on how much a seller can credit a buyer. It’s usually 3 to 6 percent of the purchase price. Before you write an offer, find out your lender’s limit. Then ask the seller to credit you a dollar amount that falls within the lender’s guidelines. This way you won’t raise a red flag with the lender that could cause your loan to be denied.
Also be aware that appraisers are taking a hard look at seller credits to determine if they affect the market value of the property. If you inflate your offer price to cover the cost of points and this puts the price out of line with current market value, the lender could lower the appraised value. In this case, your mortgage amount might also be lowered, leaving you short on the funds you will need to close.
No one knows the future direction of interest rates. But, if you believe that interest rates will come down soon and that you’ll refinance into a lower-interest-rate mortgage, you might be better off paying a higher rate now and no points.
Another way to reduce your mortgage interest rate on jumbo financing is to create a blended rate by combining a low-interest-rate conforming loan with a second mortgage. Secondary financing is available in amounts up to $500,000 for buyers with a 20 percent cash down payment, a good credit score (over 700 with some lenders) and verifiable income.
By combining a conforming $400,000 fixed-rate first mortgage at 6.25 percent with a fixed-rate $400,000 second mortgage at 7.4 percent, you end up with a blended rate of 6.8 percent. So, you create jumbo financing for under 7 percent in an over-7 percent first-mortgage market.
Most conventional second mortgages have payments that are amortized over 30 years, with a due date in 15 years. This means that there is a balloon payment when the loan is due, unless you pay the principal down substantially during the term of the loan.
THE CLOSING: Make sure that there is no prepayment penalty on the second mortgage so that you can make pay-downs or pay the loan off at any time without penalty.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.