Q. We own a home in Montgomery County that is worth at least $1,500,000. We have a first trust mortgage in the amount of $850,000 at a rate of 6 percent. I understand that our loan balance is too high to qualify for the new loan limits set by Fannie Mae and Freddie Mac, but I have read that lenders are offering lower rates on jumbo loans. I haven’t found this to be true after making a few phone calls. What do you think? Are we candidates to refinance?
A. I, too, have read that lenders are lowering their jumbo rates. While this may be true, everything is relative. The temporary loan limit set by mortgage giants Fannie Mae and Freddie Mac is $729,750 in Montgomery County. These limits vary by area based on property values.
For those folks who live in a designated high-cost area and are seeking a loan within loan limits, the rates available are pretty good - only if the borrower meets certain criteria.
For example, a borrower seeking to refinance a $700,000 loan may be able to receive a 30-year fixed rate as low as 5 percent with no points or origination fees. That’s cheap money, but the applicant must meet the following conditions:
The loan-to-value ratio cannot exceed 60 percent, which means the property must appraise for at least $1,167,000.
The applicant’s credit score must not be lower than 700.
For a refinance, taking cash out is not allowed.
The applicant must have verifiable income and assets to support the loan.
The rate can only be locked for 15 days, which means the borrower must understand that the rate is “floating” during the processing time. This means the rate is subject to change until the application package is ready for underwriting and can be closed within the 15-day lock period.
These so-called “agency jumbo” fixed-rate programs are available to folks who do not meet this criteria. The problem is that the rate offered is a lot higher.
An applicant seeking to refinance a $700,000 loan secured against a property worth $875,000 with a credit score of 680 can expect to pay a rate of about 5.75 percent with one point.
Good mortgage money is out there. There’s just a smaller pool of eligible applicants.
For homeowners like you, with loan amounts exceeding the agency jumbo limit, there are very few options. While it’s true that some lenders have lowered their jumbo rates, I haven’t seen these fixed rates fall below your existing rate of 6 percent.
However, there are lenders who are offering very competitive rates on some adjustable products.
If you have a good credit score, you are probably eligible to refinance your 6 percent fixed rate into a 5 percent 7/1 adjustable-rate mortgage with no points.
If you are prepared to accept the fact that the rate can change after seven years, the numbers make for a compelling argument.
The difference in the principal and interest (P&I) payment between 6 and 5 percent on $850,000 is $533 per month. Closing costs in Montgomery County may total $4,000. It would cost you $4,000 to save $533 per month for the next 84 months. This is a net savings over seven years of almost $41,000.
At the end of seven years, you are ahead of the game by $41,000 before the rate changes. That’s pretty compelling.
A 5/1 ARM carries an even better rate of 4.75 percent. Not bad for jumbo money.
While I don’t necessarily recommend certain mortgage products, such as ARMs, it is my job to lay out the product menu so the borrowers can make educated choices. We are refinancing dozens of borrowers under these two programs.
All of our applicants consider it unlikely that they will be in the property for longer than the initial fixed-rate period, allowing them to save a lot of money with little or no risk.
Henry Savage is president of PMC Mortgage in Alexandria. Reach him by email at email@example.com.