When buying property, there is much to consider. Not only does one need to think about the listing price for the home, but also the cost associated with buying. Unless you are paying for a home in cash, taking out a mortgage is your only option.
There is a loan cap on how much government run agencies can lend. These are called conforming loans and they have to be under $417,000. If you live in an area with high costs, such as New York City, the loan limit goes up to $625,000. What if you want to borrow more? Then you can apply for a jumbo mortgage.
The standard for mortgages is a 30-year fixed rate option and a 15-year fixed rate option. The rates for these two options are fixed, which means whatever interest rate you agreed to pay is what you pay for the length of your contract. If you cannot pay, you would have to refinance your home.
There is another option called an adjustable mortgage. This option enables borrowers to pay a lower mortgage rate, but in the event rates increase, borrowers will be responsible for paying higher rates. Always be sure to discuss different mortgage options with your lender before signing.
Fixed rate mortgages are currently higher than they have been in years, thanks to a bounce back in the housing market. Thirty-year FRM is at 4.46 percent and 15-year FRM is at 3.47 percent. They are expected to rise in the future.
The Federal Housing Finance Agency oversees the adjustment of mortgage rates. Freddie and Fannie took a huge loss when mortgages defaulted in 2007, leading to a burst of the housing bubble. As foreclosures grew and for sale signs sprung up, listing prices were cut significantly and mortgage rates fell dramatically. In order to increase reserves in both companies now that there is an upswing in the economy, mortgage rates are up and so are other costs.
The Jumbo Mortgage difference
Freddie or Fannie don’t back jumbo mortgages so those mortgages are not subject to their policies or fees. They are rates set by non-government lenders. So why are some lenders offering jumbo 30-year fixed mortgage rates as low as 4.3 percent? Lenders want to attract wealthy clients. Wealthy clients enable lenders to cross-sell other products such as other financial accounts and brokerage services, if clients own other properties and want to sell. Low rates also make the idea of refinancing null and void, meaning, the client stays with the bank longer.
Another perk for the wealthy is the option of a 5-year adjustable rate mortgage. Five years is a pretty short time to be in a home, but people who know that they will not be living somewhere for more than five years, win big with this option and so do banks. Wells Fargo offers a 5-year ARM for 2.375 percent. What is a steal! This option allows for unheard of savings in comparison to the 30-year fixed mortgage rate option. At the end of the five years, homeowners can either refinance or sell.
There has been much conversation around the initial targeting of the wealthy with these super low rates. However, there isn’t anything unethical about the practice. Wealthy clients pose less of risk for default on their loans. Furthermore, the homes they are purchasing are more than double that of the average price home in a non-high cost area.
On the surface, it does seem unfair that those buying more expensive homes get a break, but one has to remember that business is business. If your finances do not fall within jumbo mortgage territory, then that’s fine. It’s always best to make sound financial decisions that work for your budget.
Please our mortgage page for more information on the best mortgage rates.