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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2013

How to Weather the Rebound in Rates

Help clients with jumbo loans survive climbing interest rates

Since the Federal Reserve’s first rumblings that quantitative easing was coming to an end eventually, the mortgage industry has seen a shift, not only in interest rates, but also with products and jumbo pricing. Earlier this year, the 30-year fixed rate was as low as 3.25 percent for conforming loans and about 3.5 percent for jumbo loans. Rates jumped at unusually fast speeds all the way past 4.5 percent this past summer, before beginning to inch down slowly this fall.

Although the decrease in interest rates is promising, it seems unlikely that it is sustainable. Eventually, quantitative easing will end, and rates will increase as the economy continues to improve. The question for mortgage brokers and originators who specialize in jumbo loans is: How can you help clients deal with increasing interest rates — which inevitably mean increasing mortgage payments?

Jumbo options

Interest rates for mortgages often are the primary concern for consumers, particularly those who require nonconforming or jumbo products. Recently, the rates for various products have been in the following ranges:

  • Conforming: Fannie Mae products (anything under $417,000) are between 4.25 percent and 4.5 percent.
  • High-balance conforming: Fannie Mae products (loans between $417,000 and $625,000) are between 4.375 percent and 4.625 percent.
  • Jumbos: Not sold to Fannie Mae, these rates have been between 4.5 percent and 4.75 percent.

Mortgage originators working with the jumbo portion of the market must find a more affordable solution for their clients. There are three potential ways in which brokers can work on lowering the jumbo rate.

  1. Work with investors willing to give discounts: One way to help get clients lower rates is to sell your loans to investors who offer discounts. For instance, a lender may offer a 0.25 percent discount to jumbo loans for clients who open a checking account and include auto-deduct for their mortgage payments.
  2. Work with banks that give discounts for additional business: There are several private banks that offer discounted rates to clients who meet the private banking criteria. These banks like to entice the client with lower mortgage rates, so they eventually can establish banking relationships with them. Generally, they will ask to see $500,000 in liquid reserves after closing.
  3. Consider an adjustable-rate mortgage (ARM): These products are fixed for five, seven or 10 years. They are amortized over 30 years. They offer bigger discounts currently than in previous years. Many consumers only keep their mortgage for three to five years, and after that, they often refinance, take cash out, marry, divorce, etc.

One of the biggest benefits to ARMs is their low initial interest rates. For example, this past fall, 5/1 ARM rates started at 2.625 percent; 7/1 ARM rates started at 3.375 percent; and 10/1 ARM rates started at 3.875 percent.

In addition, there are caps to the rates on an ARM. The lifetime cap is generally 5 percent higher than the starting rate, and there is generally a 2 percent annual cap. When your five-, seven- or 10-year ARMs come due, add the index — a one-year Treasury bill or Libor — to a margin of 2.75 percent to get the new rate. Chances are your clients no longer will have the mortgage at the time of the adjustment, but if they do, the caps are in place.

The right payment

As interest rates continue to pose a challenge for jumbo borrowers, mortgage originators must be creative in finding solutions to get their clients in the homes they want — at rates they can afford.

One solution is to look for a lender that allows extra years of amortization. For example, some banks may offer a 40-year loan term. On a $1 million loan at 4.5 percent with the typical 30-year amortization, the payment would be about $5,066.85.

Let’s assume that your client is tight on ratios and can’t qualify for a payment of more than $4,700. If you take that same principal balance and rate and amortize it over 40 years, you have a payment of $4,495.63. Now the deal works and the client can get the mortgage.

Another technique to reduce today’s high payments is the old-fashioned tool of buying down the rate by paying points.

The old formula is one point is equal to 0.25 off the rate — this formula is not black and white, but it is a good guideline. With ARMs, you may get more than 0.25 off with a one-point buydown.

So, how can your client get that 3.5 percent rate seen this past March? For example, say your client applies for a loan amount of $417,000. The client wants to buy, but only with the low rates seen earlier this year. Using the base guideline, the client will have to pay four points to buy the rate down to 3.5 percent.

Each point is considered to be 1 percent of the loan. So, in essence, the client is paying an extra 4 percent of the loan amount. Ask the seller to pay the 4 percent or, at least, split it. It could be part of the seller’s concession and would advance the closing. This deal, however, often depends on the amount of inventory on the market and whether the buyer has other competitive offers.

•  •  •

When dealing with jumbo loans, the issue of interest rates and higher payments is of paramount importance. Mortgage brokers and originators who work in this niche must be aware of the different options available to their clients to buy the home they want with a payment they can afford.


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