By Jason Katz, Vice President of Mortgage Lending for Guaranteed Rate Mortgage
Jumbo loans are not only making a comeback; they are coming back in all shapes and sizes.
Since the latter part of 2013, jumbo loans have been making headlines because something quite unprecedented happened: jumbo loan interest rates started to drop below conforming loan interest rates. Traditionally jumbo loan rates have been between 0.25 and 0.5 percent higher than conforming loan rates, and during the financial crisis, the rates on jumbo loans skyrocketed. So why are jumbo loan interest rates uncharacteristically low?
Making jumbo loans attractive is one way banks can attract wealthier clients. Such low interest rates make refinancing the loan unnecessary; therefore, the wealthy client stays with the bank longer and gives the bank the opportunity to sell the client other products, such as financial accounts and brokerage services. Also, wealthy clients are less likely to default on a loan.
To make jumbo loans even more attractive, banks have started promoting shorter repayment periods: from 10-20 years,instead of the traditional 30-year mortgage. Wealthy clients can afford the larger monthly payments of a shorter term loan and still reap the tax benefits while paying less in interest. According to AnnaMaria Andriotis of the Wall Street Journal, much of the demand for shorter term jumbo loans is for refinancing. Thanks to the low interest rates, existing borrowers may be able to maintain a similar monthly payment over a shorter period of time.
Andriotis continues to say, “the starting rate on a 30-year fixed-rate jumbo is 4.5%, while the starting rate on a 10-year jumbo is about 3.4%. Over the life of a $1.5 million mortgage, borrowers will pay more than $1.2 million in interest with a 30-year period, compared with roughly $271,000 in interest with a 10-year term.”
Another jumbo loan option currently promoted by banks is the 5/5 ARM. The jumbo 5/5 ARM has a fixed rate for the first five years, after which it resets to a new interest rate for the next five years –and so on throughout the life of the loan. The 5/5 ARM might give the borrower a better chance of receiving a lower interest rate at the point of reset than if the loan adjusted annually. Some banks are offering incentives for this program, including waiving closing costs or offering rate-reset protection, which allows borrowers to adjust the rate earlier than scheduled.
With low interest rates and a variety of incentives, a jumbo loan might be a great choice for you. However, it’s important to take your time, shop around, and ask the right questions. You have to make sure the terms are right for you, the rates are competitive, and that you fully understand the cap structure options on ARM loans.
If you have any questions about jumbo loans, please don’t hesitate to contact me. With over 15 years of experience in the mortgage industry and an impressive track record of 100% on time closings, I look forward to finding you a loan to meet your needs. Email me at
or call me at 858.768.5953. NMLS ID: 312660
The views, facts, and opinions expressed in this article are solely those of the original author and other contributors and do not express the opinions of Guaranteed Rate, Inc.