High median-home prices mean that buyers will require an expensive jumbo mortgage unless they use one of these strategies.
When you were a kid, you may have thought of a million dollar home as some sort of mansion. The reality is that if you live in certain parts of the country, a million dollar home isn't all that. Maybe it's a two-bedroom apartment!
In places like in the San Francisco Bay Area where the median sales price of a home is $620,000 or in New York City where the median sales price of a home is $1,075,000, purchasing an expensive home doesn't mean that you are rich. Oftentimes, it just means that you are buying what is available.
In order to raise this kind of money, buyers will often have to rely on jumbo mortgages. By definition, a jumbo loan is a mortgage loan amount that is higher than the conventional conforming loan limits set by Fannie Mae and Freddie Mac.
Specifically, a jumbo mortgage is a home loan that is larger than $417,000, though in certain "high-cost" areas, the limit set by the Feds for a conforming loan can go up to $729,750.
Starting Oct 1st, the feds are reducing the size of mortgages that it will guarantee in high-priced areas. This means that in many areas the maximum guarantee will drop from $729,750 to as low as $465,750.
That's a huge drop and a stumbling block for people who live in areas like San Francisco and New York City.
It's easy enough to get a jumbo mortgage, though, right? Not really.
Jumbos are harder than ever to get due to new regulations.
Because they are higher risk loans, not as many lenders offer them.
Jumbos carry higher interest rates and points than equivalent conforming loans.
Luckily, there are a few ways to get around the necessity of taking on a jumbo loan:
1)Make a large enough down payment to bring the loan down to the conforming limit. For example, if you are looking to purchase a $600,000 home and the limit in your area is a $417,000, you can put down $183,000 to bring the loan down to the limit.
2) Get two mortgages instead of just one. First, get a conforming mortgage and then piggyback with a second mortgage. You'll get a lower rate on the first $400,000 and then pay a higher rate on the second portion. Still, your overall rate is likely lower than that on a jumbo. Also, if you get both loans through the same lender and have them close at the same times, you can often lower your closing costs.
3)Pursue a super-conforming mortgage, which is somewhere in-between a conforming and a jumbo mortgage. Then, again, piggyback with a second mortgage. This is the same idea as before and will ultimately cost you less than a jumbo.
4)Use an ARM. You'll have to put down a much larger down payment of 20-35% and your risk increases (the risk of the rate going up), but your rate will be closer to the rate on a 30-year-fixed conforming mortgage (fingers crossed!).
While you may be looking to buy a place at a price that you never in your wildest dreams imagined that you'd have to pay- the reality is that in this day and age, an expensive house is sometimes your only real option. And an expensive house isn't what it used to be. Before panicking that you'll have to get a jumbo mortgage (if you can find one), get creative with your financing and pursue one of these options!