The current definition of a Jumbo loan is an amount borrowed larger than $417,000. However if the loan amount is between $417,100 and $523,750 (many counties in eastern MA -- your counties maximum loan limit maybe higher or lower), then this is considered a Conforming Jumbo until January 1, 2009. The Housing and Economic Recovery Act of 2008 that was signed into law will increase the conforming limit ($417,000) to 115% of an area’s median sales price. I expect that for most counties inside the RT 128 belt of Massachusetts the definition of Jumbo loans will be those loans greater than $481,850 beginning in the New Year.
Most Jumbo loans are not on the edge to the conforming market, a few thousand dollars over the limit. Many families find they need or want a mortgage much greater than the current limit. Typically a Jumbo borrower is able to put twenty percent or more down on the purchase, typically from the sale of their current residence. If this describes your circumstance read on.
So what are the best Jumbo loan products available and why? The fact is the thirty-year fixed rate market has become very expensive for Jumbo financing, especially for a loan amount over $650,000. Therefore I have found that the intermediate portfolio adjustable rate mortgage (ARM) loans work best. These are the five and seven year fixed loans that adjust after the initial fixed period. My first reason to use these products is because the spread in rates between the 30-year fixed rate and the 5/1 or 7/1 ARM have widen sharply. The second reason is that private (non-governmental) 30- year fixed money has all but evaporated from our market; this leaves only the portfolio lenders. The third reason I recommend these loans is the current housing market slump will not last forever. As the housing market recovers there will be ample fixed rate mortgage money to replace this loan if needed; see the chart on the next page from the Office of Federal Housing Enterprise Oversight. This is a national chart created by the forecasters’ that the entire real estate industry trusts, because they predicted the downturn and saw the bubble in 2005 and 2006 – this is the organization that got it right! You will be hard pressed to pick the absolute bottom of this market. By the time the bottom is recognized the recovery will already be six months to twelve months into its cycle.
Other considerations for using portfolio intermediate fixed ARM is the Yield Curve. I would much rather stay on the short term end of the interest rate market than the long term. The traditional yield curve is plotted on an X and Y chart where X equal interest rate and Y equals term. Historically one should find that as the term of the debt repayment lengthens the corresponding rate is higher. So a one-year term Note would have a lower interest rate than a thirty- year term Note. However one indication that a recession is forthcoming is when the Yield Curve will become inverted; in this case short term interest rates are actually higher than long term interest rates. This has happened several times in the last two decades; I blame most of it on the Federal Reserve policies and unfortunately those cannot be expounded in the scope of this paper.
Bottom line best overall cost of financing today’s Jumbo loan is with the use of 5/1 or 7/1 ARM. The housing market will recover. Sanity will eventually return to the mortgage marketplace where entrepreneurial lenders will develop and be able to sell Jumbo fixed rate loans as competitively priced as the conforming market. Don’t let the irrational fear of an ARM trick you out of purchasing in this housing market. You will lose more by not acting.
*I have strategies on how best to negotiate and buy property in this market. I am building teams of realtors and other professionals to implement and utilize these strategies so that both the buyer and sell win in every transaction. Call or email me today to learn more on how you can implement these strategies to win in this market.
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