Remember how buying that big house seemed like such a good idea? The amenities, the extra space, the ability to impress your friends — as the recession grinds on, you'd trade all that for smaller utility bills, lower property taxes, and less square footage to mow, vacuum, dust, repair, and repaint. And you'd like to deal with a not so big mortgage. As the credit crunch lingers, that may be the biggest headache of all.
While home loans in general have responded well to the Federal Reserve's efforts to lower interest rates, that's not true of the plus-sized loans the industry calls jumbo mortgages. That's because the secondary market for jumbos has been largely wiped out by the crisis. As a result, if you are looking to refinance one, you should expect the lender to require a much higher interest rate and down payment than for a standard mortgage. The tougher terms likely make your home less attractive to potential buyers, who — even if they can handle the costs of your home — may not qualify for a jumbo loan.
And if all that's not bad enough, what little help you were getting from the government with the costs of the loan may be slashed soon. The Obama Administration's budget proposes slicing mortgage deductions for families with incomes over $250,000.
What a Jumbo Mortgage Is
A jumbo mortgage exceeds the size automatically accepted by secondary mortgage lenders Fannie Mae and Freddie Mac, what’s known as “the conforming limit.” In most places, this means a mortgage over $417,000 in 2009; in high-cost housing areas, a mortgage exceeding $625,500 is a jumbo. (The Federal Housing Finance Agency lists jumbo limits around the country).
Lately, the interest rate on a 30-year fixed-rate jumbo has been about 1.5 percent higher than a non-jumbo — or around 6.4 percent. The rate on a jumbo 5/1 ARM (the rate is fixed for five years and then resets annually) has been about .6 percent higher than a comparable, non-jumbo 5/1 ARM, though about 1 percent lower than a 30-year fixed-rate jumbo. Expect to make a down payment of up to 40 percent for a jumbo, and to provide extensive documentation of your income and creditworthiness.
The Vise May Tighten
As if the squeeze on jumbo borrowers wasn’t painful enough, it may get even worse. The Obama Administration’s proposed 2010 federal budget would restrict the amount of mortgage interest that households with incomes over $250,000 could deduct — those in the 33 and 35 percent brackets. You’d need to calculate the write-off as though you were in the 28 percent bracket. That could slash your interest write-off on a $425,000, 30-year jumbo loan from $7,100 a year to $6,000 a year. You can do your own calculation at Bankrate.com’s mortgage tax deduction calculator.
What’s more, with a smaller write-off, lenders would require you to show a lower debt-to-income ratio than they would today, to ensure that you can afford the higher after-tax monthly payments. Losing part of the deduction would hit high-income clients hard, says Tracy Cavanaugh, lead planner for the CS Advisory Group, a mortgage broker with offices in California and New Jersey.
What to Do Now
During the real estate bubble, jumbo lenders often customized the mortgages through “creative” loans for professionals, the self-employed, and business owners. Now that the bubble has burst, many traditional jumbo lenders are in trouble and shutting their doors. So your best bet for finding a jumbo is to go to a state-chartered bank or credit union that didn’t get caught up in the mortgage frenzy.