The Return of the Big Mortgage

Low interest rates are driving high-end home buyers to supersized mortgages at a pace not seen since the housing boom.

Smart Money

18 July  2011

Low interest rates are driving high-end home buyers to supersized mortgages at a pace unseen since the housing boom. But the deals may have a limited shelf life.

So-called jumbo loans — generally those bigger than $417,000 — are a better bargain now than they have been in years. The average rate on a 30-year jumbo mortgage is 5.15%, down from 6.41% two years ago, according to mortgage data firm HSH Associates. That means the monthly payment on a 30-year $600,000 home loan is now about $3,280, some $480 less than the cost of the same loan two years ago, for an annual savings of nearly $5,800.

Not only are jumbo loans cheap relative to historical rates, they are cheap relative to smaller “conforming” loans, which are backed by Fannie Mae, Freddie Mac and federal agencies. The difference between the rates on a jumbo mortgage and a conforming loan is just 0.43 percentage point, the narrowest spread since 2007.

That makes borrowing bigger amounts more attractive than it has been in recent years, and also presents opportunities for buyers who might have been previously locked out of pricey markets due to higher rates, says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.

Buyers already have taken advantage. Jumbo loans accounted for almost one in every six new mortgages, including new-home purchases and refinances, in the first quarter of 2011, according to Inside Mortgage Finance.

At that pace, the number of jumbo loans issued in 2011 could be the highest in five years, when the housing market was near its peak. That is in part because people are trying to lock in a government-backed jumbo loan now ahead of a planned limit reduction.

Starting in October, the federal government will start easing its support of jumbo loans as large as $729,750, which it began as an emergency measure three years ago. The new limits will vary by location, but will drop to $625,500 in top-tier markets such as New York, Los Angeles and Washington, D.C.

Many potential buyers are trying to take advantage of substantial price declines of expensive homes over recent years, Mr. Gabriel says. That includes people who bought well before the housing bubble and who are still significantly above water now and want to trade up while prices are low.

Other prospective buyers who sat out the boom but stayed employed and saved money during the downturn now have money for pricier houses, and the jumbo loan is their ticket in.

Right now, some of the cheapest jumbo mortgages can be found at independent mortgage firms, some of which are Web-based. Those include Ultra Mortgage LLC, WCS Lending LLC and Multi-State Home Lending Inc., where the annual percentage rate on a 30-year fixed nonconforming jumbo loan ranges from 4.64% to 4.99%, according to LendingTree LLC, which tracks mortgage rates.

Depending on location, jumbo loans typically require a down payment of 20% to 30%, says Keith Gumbinger, vice president of HSH Associates — double or triple the typical 10% down payment for a smaller loan. Buyers also need to be able to document their income, assets and net worth, including two years of tax returns and recent brokerage and bank statements, he says. They also will need high credit scores, at least 740 to 760 on the FICO-score range.

But borrowers should act quickly. Since lenders won’t be able to sell as many jumbo loans to government-backed agencies — thereby unloading risk — they may not originate as many, says Mr. Gumbinger. What’s more, the added risk means they likely will raise their interest rates. The upshot: buyers could have fewer choices and face pricier loans.

Many lenders will have to stop originating mortgages over the $625,500 limit by the end of July for home purchases and by mid-August for refinances, Mr. Gumbinger says, since mortgages can take up to two months to close.

All of this could make it harder for home buyers to get financing, possibly leading to fewer home sales and pushing down prices.

Still, some housing analysts say that with the government out of the way, more lenders will eventually start competing against one another — perhaps as early as next year. The renewed competition could result in easier lending standards over time.