Mortgage Q&A: Bravo for jumbo refinance

Last week I reported that the rates on the so-called “agency jumbo” loans were dropping. Congress

recently passed legislation allowing Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac), the two government-chartered entities that purchase loans from banks, to increase their loan limits to $749,750 in certain high-cost areas, including the Washington area.

This is up from the conforming level of $417,000.

Initially, the rates offered on these programs were more than 1 percent higher than those with loan amounts under $417,000 - in excess of 7 percent for a fixed rate.

While this is lower than the 8 percent range for traditional jumbo loans, 7 percent isn’t low enough to stimulate the housing market or provide an economic boost through a refinancing wave.

Recently, however, the agency jumbo rates have fallen to the low 6 percent range. I’ve been getting a lot of calls and e-mails from clients who have low jumbo rates due to adjust within 12 to 24 months.

I am recommending that these folks lock in and grab the fixed rate, even though it may be higher than their current adjustable-rate mortgage (ARM). My argument is compelling; let me illustrate:

A client with whom I’ve been in contact has a $600,000 loan at 4.375 percent adjusting in eight months. If interest rates remain stable, he can expect his interest rate to increase to about 5.875 percent. I offer him a 30-year fixed-rate loan at 6.125 percent with zero points and zero closing costs.

It’s difficult for homeowners to refinance to a higher rate resulting in higher borrowing costs and higher monthly payments. However, I urge him to get the refinancing done. We have to look at the big picture to understand my logic.

First, 30-year fixed-rate jumbo loans that carry zero fees have only been under 6 percent three times in my 20-plus-year mortgage career. Historically, these rates have been a lot higher. The timing is historically right.

Second, the legislation by Congress authorizes these loan limits only until the end of 2008. When or if these products disappear, jumbo loan rates will be at the mercy of Wall Street investors, who have not gained any real appetite for mortgage money since the meltdown.

It’s highly unlikely that this will be sorted out by the end of the year.

Third, while there are continuing signs of a slowing economy, there are also signs of inflation. Inflation typically causes long-term rates to rise. Last week’s report that the core inflation rate rose to a 17-year high does not bode well for lower mortgage rates in the future.

My advice? Don’t get greedy. If you have a jumbo ARM and don’t plan on selling any time soon, grab a fixed rate now. Make sure you pay little or no closing costs because if I’m wrong, you can refinance again if rates fall lower.

@