GUEST BLOGGER TONY DEMCHAK (My wonderful brother and Branch manager)
Typically Jumbo loans (loans exceeding a certain limit- currently $417,000) were financed at the bank level or purchased in the secondary market in specialized pools called mortgage backed securities that were not backed by Fannie Mae or Freddie Mac (Government Secured Entities or GSE's). The interest rate on these loans was typically .5-1% higher than the equivalent conforming loans that were pooled by the GSE's.
As a result of the housing crisis in 2008, access to jumbo loans all but disappeared. In response, the Housing and Economic Recovery Act of 2008 included an allowance for the GSE's to purchase jumbo loans up to "temporary high-cost area loan limits," that were established in the act. Because of the pedigree associated with the GSE's, instead of a .5%-1% premium on interest rate, the premium on jumbo loans that fit the guidelines is now between .25% and .5%.
There is no guarantee that the GSE's will continue to offer this option to jumbo loan holders and the limits are subject to change. As the GSE's attempt to reduce their risk pool, eliminating this pool of loans from its future portfolios may become necessary.
With rates still low but threatening to rise and the likelihood that the GSE's will be leaving the jumbo market, now looks like a good time to consider buying if your new home will be purchased for more than $417,000 and to aggressively look into refinancing if you already have a jumbo loan with a rate above 6%. For now, we will look at what is available if looking to refinance.
There are several options when deciding your best course of action. If you have significant equity in your home, a refinance to a high-balance loan that is backed- or at least that will be purchased- by Fannie Mae or Freddie Mac might be an excellent choice. The loan to value- the amount borrowed divided by the appraised value of your home- for this type of loan is typically capped at 80%. Since property values have fallen in recent years (4-5% in the last year and 15-30% in the last four years, conservatively) meeting this mark, even if you put 20-30% down and have been making regular monthly payments, may be difficult.
There are other options though. If your loan was purchased by Fannie Mae or Freddie Mac and was a conventional loan at the time (which probably means you got the loan after 2008) you may be able to lower your interest rate by using what is called a HARP loan, for Home Affordable Refinance Program. This loan allows for extended loan to values (beyond the 80% cap) with little impact on the rate offered, assuming your credit is excellent and you do not have a second mortgage that cannot be paid off with your owe funds. The best thing about this program is it allows you to avoid mortgage insurance even if your home's value has dropped.
If you don't have significant equity or your loan was not purchased by Fannie Mae of Freddie Mac, you may still have an option. Though many people consider FHA loans to be for first time homebuyers, that is just not so. FHA loans are used by many buyers who choose to put less money down on their home and for those who wish to refinance but who have little equity. Because FHA is an insuring entity and not a lending entity, loans that are insured by FHA are typically a bit easier to qualify for and can carry a better interest rate than the non-insured equivalent. The up front mortgage insurance premium that is paid to HUD was reduced recently to 1% of the loan and the monthly premium ranges from .85-.9% on an annual basis. The monthly premium will terminate when you have 22% equity which will take some time if you make the minimum payment but can be reduced to a little as five years if you make extra payments. Making extra principal payments will certainly be easier at a lower rate. The mortgage insurance premium is now tax deductible.
Though Fannie Mae and Freddie Mac are currently funding these jumbo loans and FHA is currently insuring them, there is no certainty that this will continue for much longer. With the tightening of the belt in D.C. and the state of the deficit, not to mention the losses at Fannie Mae and Freddie Mac, time might be running out.
If you are considering purchasing a home in Maryland and want to be sure you are mortgage ready, my brother Tony and I will be happy to help! We help to make the mortgage process a pleasure!
If you already own your home, we are happy to provide a no-cost mortgage review to help you to determine if refinancing may be in your best interest. Please contact me at 410-960-2061.