Despite Lower Jumbo Rates, Refi May Be Unwise

by Dian Hymer, Inman News
House photoBorrowers assumed when the conforming loan limit increased from $417,000 to $729,750 in high-priced areas like New York City, Los Angeles and the San Francisco Bay Area that lower rates on jumbo financing would follow. Unfortunately, the conforming jumbos (also called jumbo lights) were initially priced considerably higher than the conventional conforming loans.

For example, on May 2, 2008, a $417,000 conforming loan was available with a 5.38 percent interest rate and one point. Points is the term lenders use for the loan origination fee. One point is equal to 1 percent of the loan amount. At the same time, a jumbo light was priced around 6.25 percent and one point.

Mortgages are offered with or without points. The mortgage interest rate will be about one quarter percent lower if borrowers pay one point than it would be if they paid no points.

On May 8, pricing on the jumbo light conforming mortgages was brought in line with the conventional conforming loans. This is good news for both home buyers and homeowners who need to refinance.

A 30-year jumbo light fixed mortgage was offered at 5.625 percent and one point and 5.875 percent with no points on May 9. Conforming loans in amounts to $417,000 were offered for the same interest rate, with a 1/4 or 3/8 percent discount on the origination fee.

Nonconforming jumbo financing is still running about 7 percent. With the recent rate reduction on conforming jumbos, borrowers searching for larger mortgages will be able to achieve a lower blended rate by combining a $729,750 conforming first mortgage with a home equity loan of up to $500,000 with an interest rate as low as 5 1/8 percent.

Homeowners who purchased four to five years ago using a fixed ARM mortgage product have been worried about refinancing in today’s difficult financing arena. It was anticipated that when the mortgage reset from fixed to adjustable, much higher mortgage payments would follow.

Fixed ARMs are mortgages that have a fixed interest rate for a period of time (often three, five, seven or 10 years). At the end of this period, the loan converts to an adjustable-rate mortgage (ARM) with an interest rate and monthly payments that fluctuate. ARMs are tied to an index, which is a cost of funds. A margin — usually in the 2-6 range — is added to the index rate to determine the current mortgage rate.

HOUSE HUNTING TIP: Many fixed ARMs are tied to either a Treasury or London Interbank (LIBOR) index. Thanks to the Fed’s rate-cutting campaign, these indices are relatively low today. You may find that it makes more sense financially to keep your mortgage for now even though it converts from fixed to adjustable, particularly if you plan to move soon.
On May 8, the 1-year LIBOR rate was 2.99 percent. If your mortgage reset on May 8 to an ARM that was tied to the 1-year LIBOR and had a 2 percent margin, your interest rate would have adjusted to 4.99 percent.

To find out if it makes sense to refinance or not, look at your note. It spells out the terms of the loan such as the interest-rate adjustable schedule, the index that your interest rate is tied to and the margin. Your lender can provide you with a copy of the note.

There are risks involved in waiting to refinance. If market values decline, your home might not appraise for enough at a later date to pay off your existing loan balance. Also, the Fed is watchful for any indication that inflation is getting out of hand.

THE CLOSING: If inflation fears rise, the Fed will stop lowering interest rates, and could start increasing them again.

Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
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Copyright 2008 Dian Hymer

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