Smart Borrower Blog

Avoiding Jumbo Mortgage Rates


Sep 26th, 2007 @ 1:05 PM by MortgageMentor


There has been a lot of press lately about the large point spread between interest rates on conforming mortgages and non-conforming, or “jumbo” loans. In particular, this has impacted borrowers who need regular thirty year fixed rates for loans above $417,000 which is the cut off for conforming mortgages. At one point, some lenders were asking 8% on these loans for borrowers with good credit and 20% down. Right now, jumbo rates are in the low to mid 7’s, nearly a full point higher than a conforming 30 year fixed rate mortgage.

Say you wanted to purchase a property for $750,000 and put 20% down: This would give you a mortgage of $600,000 which is well into jumbo mortgage territory. Let’s assume an interest rate of 7.5%. This amounts to a monthly payment of $4195. Ouch.

Is there an alternative to higher jumbo rates? Of course there is, if your mortgage broker or loan officer knows how to think out of the box.

A better approach is to artificially cap the mortgage at $417,000 which is the maximum conforming loan amount, then take out a second mortgage for a balance of $183,000. The two loans provide the $600,000 mortgage we need. The rate on the first mortgage would be in the low to mid 6’s. Borrower with good credit and lower loan-to-value amounts can see very favorable second mortgage rates that are probably lower than typical jumbo rates. For instance, I can get a fixed rate second mortgage at about 7.115% right now with a combined loan-to-value (CLTV) less than 80%, similar to that in our scenario.

If we assume a first mortgage rate of 6.5% the payment on the $417,000 mortgage will be $2635. Just to show how great this works, let’s assume the second mortgage is 7.5% for $183,000 which gives us a payment of $1279. The total payment between the two loans is just $3914! The weighted or blended average interest rate between the two loans is just 6.805% which is a lot better than 7.5% on a $600,000 loan. This approach saves $281 per month or $3,372 per year!

More than just simply avoiding jumbo mortgage rates though, our scenario illustrates is that it isn’t just about the interest rate. The lowest rate on the wrong mortgage does not help you. In this case, many consumers would have just shopped for the lowest jumbo mortgage rate not realizing that they could have structured their mortgage as demonstrated in order to save thousands of dollars per year.

Good mortgage brokers understand how to objectively look at a problem and crunch the numbers to save their clients money and to help them properly structure their mortgage. This is the difference between working with a mortgage professional and just an order taker screaming about their lowest rates in town and with closing costs.

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