Rich homebuyers can now get mortgages cheaper than pretty much everyone else.
In an unusual twist, lenders are offering rates on jumbo mortgages that are more than a quarter of a percentage point lower than those on the conforming loans backed by Fannie Mae and Freddie Mac. The government-run agencies require conforming loans to be below $417,000, unless they are for homes in high-cost areas like New York or Los Angeles,where the limit is $625,500.
Jumbo loans exceed those dollar limits and, historically, banks charge higher rates on them -- about 0.25 percentage points more -- than they do for conforming loans, according to the Mortgage Bankers Association. But over the past couple of months, the tables have turned.
This week, Wells Fargo (WFC) advertised a 30-year jumbo mortgage at a rate of 4.125%, significantly lower than the 4.5% rate it is offering for a 30-year, fixed-rate conforming loan. US Bank (USB) is offering a jumbo for 3.875% this week compared with 4.25% for a conforming loan. And Chase's (JPM) jumbos have been running a quarter of a percentage point below conventional mortgages, as have TD Bank's (TD).
"Never in my memory have jumbos been such a bargain," said Peter Grabel, a loan officer at Luxury Mortgage Corp. in Stamford, Ct., with 13 years on the job.
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One big reason jumbo rates are so low is because lenders want to attract wealthy clients and hang on to them, said Malcolm Hollensteiner, head of consumer lending for TD Bank. Once clients sign up for a mortgage, the bank can "cross sell them other products, like brokerage services," he said.
That works especially well in these days of strict underwriting standards, according to Keith Gumbinger, a mortgage expert with HSH.com.
"Borrowers have to open up their whole financial picture to lenders," he said. "They can see where there's value, which they might be able to sell against."
Once a wealthy client takes out one of these low-rate loans, they are likely to stick around. "With rates as low as they are, borrowers are never going to refinance the loans. Those affluent clients will stay on the bank's books forever," said Gumbinger.
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Jumbo loans have also gotten comparatively cheaper. As the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, seeks to boost the two agencies' reserves against losses from mortgage defaults, it has raised fees and other costs for borrowers, according to Terry Francisco, a Bank of America spokesman.
Since Fannie and Freddie don't back jumbo mortgages, those fees don't apply and therefore aren't passed on to borrowers.
While the fixed-rate jumbos are great deals, the really spectacular rates are being offered on jumbo adjustable-rate mortgages, according to Grabel. Wells Fargo, for example, is advertising jumbo five-year ARMs for 2.375%.
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These 5/1 ARMs typically reset to a higher rate after five years and change every year after that. ARMs are not for everybody and some people get trapped by high interest payments once the loan resets. But for homebuyers who are pretty sure they aren't going to stay in their homes for much longer than five years or who expect their incomes to rise quickly, ARMs can keep their monthly payments quite affordable.
On a $1 million mortgage, monthly payments on 2.375% 5/1 ARM come to $3,887 for the first five years, nearly $900 less per month than what you would pay with a 30-year fixed-rate jumbo mortgage carrying a 4% rate. Over those five years, the savings adds up to $54,000.
