If recent mortgage rate movement has spooked you into refinancing, you’ll want make sure to pay particularly close attention if your loan size is bigger than $417,000. Jumbo investors in the marketplace are offering lucrative rates and deals.
Which Investor Plays a Role
It does not matter where you apply for a mortgage. Whether you are applying with a bank, credit union, a mortgage broker or even a direct lender, the investor is the separator between whether your loan will cost more and whether it will not. If the investor on your loan is Fannie Mae or Freddie Mac, the pricing will be worse in most cases, than it would be if the mortgage professional that you are applying with places your loan with a different investor. Fannie Mae and Freddie Mac charge what are called loan level pricing adjustments on loans as do other investors who purchase mortgage-backed securities. Fannie Mae and Freddie Mac purchase loans up to the $417,000 conforming loan limit all the way through the maximum county conforming loan limit going as high as 625,000 in high-cost markets. In Sonoma County, California for example that number is $520,950. While this remains, any loan going to Fannie Mae or Freddie Mac $417,001 or more, will more than likely cost more than a different investor the mortgage company probably has access to. So make sure to ask “is my loan going to Fannie Mae or Freddie Mac or to a different investor”? Fannie Mae and Freddie Mac loans are ideal if your loan is $417,000 or lower. Up until about January 2015, Fannie and Freddie were the main player for loans to maximum loan limit. Just this year additional jumbo investors have entered the market. These investors include Wells Fargo and Chase among many others, and these investors are buying loans made by banks, credit union, brokers and direct lenders.
Jumbo Investors Aggressively Pricing in the Marketplace
Ask your mortgage company about their “Jumbo” product offering. This would be especially beneficial to you working with a loan size bigger than $417,000 because jumbo investors specifically cater to this market niche. The irony is that the pricing for Jumbos may even be lower-priced than loans $417,000 or under, normally considered the ‘best priced‘ mortgages in the marketplace. Working with a jumbo investor means you will not be subject to loan level pricing adjustments (big driver of cost on mortgages) that Fannie and Freddie impose, this offers a substantial advantage to you as a homeowner looking to refinance for the lowest interest rate and payment available given your loan size.
An Illustration between the Rate Differences Comparing Fannie /Freddie to a Jumbo
| Fannie/ Freddie | Jumbo | |||||||
| Financed Loan Amount | $ 480,000 | $ 480,000 | ||||||
| Interest Rate | 4.50% | 4.25% | ||||||
| P & I Term (months) | 360 | 360 | ||||||
| Principal & Interest | $ 2,432 | $ 2,361 | ||||||
| Interest Over Term | ||||||||
| $ 395,552 | $ 370,072 | |||||||
For example another advantage to working with a jumbo investor could be the following; let’s say you have a first mortgage on your home at $400,000 and an $80,000 home equity line of credit that you would like to roll and consolidate into one. Fannie Mae and Freddie Mac would consider that to be a ‘cash out ‘refinance and your mortgage company will charge you a loan level pricing adjustment for the loan being over $417,000 and for ‘cash out’. Expect as high as much as .5% of the loan amount, being absorbed either in the interest rate paid for by you or paying for it in cold hard cash at closing. Even though you might not receive any cash out at hand, the loan would considered to be cash out especially if the second mortgage that you have on your home was not acquisition indebtedness meaning it was not used to acquire your home. This could be a wonderful niche going with a jumbo investor who will consider the loan to be ‘rate and term’. A ‘rate and term’ loan contains far better pricing considering the fact that jumbo investors not charging anything due to the size of the loan or to the purpose because they have an appetite for this mortgage loan size and scenario. It’s important to remember some jumbo investors recognize a jumbo mortgage loan to be anything bigger than $417,000. Other jumbo investors characterize a jumbo mortgage to be anything bigger than the maximum county conforming loan limit. So be sure to talk to your mortgage company when discussing jumbo loans.
Jumbo Credit Still Tight
While pursuing a jumbo mortgage loan option, know that these loan types in terms of available credit are still relatively tight. These programs want strong borrowers with good credit, a low debt to income ratio and equity. For example in order to complete paying off a mortgage that was not used to acquire the home and the account that is being paid off is a home equity line of credit, there can be no draws on the home equity line of credit in the last 12 months. Another unique credit characteristic of some jumbo financing investors is that if you’re completing a refinance on a home that you owned less than 12 months you’ll need to work with another loan such as loan issued by Fannie Mae or Freddie Mac. Some jumbo investors have a requirement that specifically states if you or refinancing a home that you owned less than 12 months the original purchase price needs to be used as consideration for the value no matter what the current market supports.
Still if you plan to refinance this year, you would be well served ask your mortgage company to qualify you on their jumbo programs if they offer any as well as the traditional Fannie Mae Freddie Mac loan so you can determine what mortgage loan program optimally aligns with your payment, cash flow and equity objectives.
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