Jumbo Loan Example
Here is a numerical example, provided by Mark Smith of Home Caliber Loans, showing the benefits of a jumbo loan with a lower interest rate than a conventional loan with a higher rate.
Sales price: $850,000
You have as much as $200,000 to put down*
(Anytime an interest rate is quoted – an APR most also be provided. I will have to give these to you separately.
Option 1: Conventional loan only.
$417,000 1st mortgage loan using a conventional (non-jumbo) interest rate of 3.5% for a 30 year fixed-rate mortgage:
1st Mortgage payment: $1,872 (Principal and interest only)
Maximum sales price: $650,000
Benefit: Conventional loan
Disadvantage: Purchasing power is limited.
Option 2: Blended Laon Concept
$417,000 1st mortgage loan using a conventional (non-jumbo) interest rate of 3.5%
2nd mortgage for $233,000 at a 5.0% interest rate:
Principal and interest on the 1st mortgage: $1,872
Principal and Interest on the 2nd mortgage: $1,250
Total Principal and interest payments: $3,122
Advantage: 20% down
Disadvantage – the blended loan concept has eroded overall purchasing power and increased cost of financing, plus it has complicated the transaction by adding a second level of underwriting, documentation, and created two loans that have to be repaid.
Option 3: Jumbo Loan
$650,000 1st mortgage (assuming 20% down) using a jumbo interest rate of 3.5%
Principal and interest on the $650,000 loan = $2,918 – the payment is almost $200.00 cheaper than the combination 1st/2nd mortgage hybrid.
You can eliminate the need to split the loans into two pieces (which is a very common method to financing higher sales prices). If you are looking at an $850,000 home, and finance a 1st mortgage at $417,000 at current market rates, and then get a second mortgage for about $233,000 with an interest rate, that can be as much as 1 to 1.5% higher than the 1st mortgage rate. This resulst in a combined cost of borrowing money that can be hundreds of dollars more per month…and can potentially overly complicate the transaction: two applications, two loans get processed and underwritten, two sets of closing documents, and then, two repayment coupons.
If you are limited to only 20% down on the sales price – a jumbo loan can, actually, INCREASE your purchasing power because of the great rates that the market is seeing now.
This example was written by Mark D. Smith, Loan Consultant at Caliber Home Loans
Please contact him for more information on jumbo and conventional home loans at 505-379-9505. Or contact us if we can help.
*Closing costs not included for simplification; payments do not include homeowner’s insurance, property taxes, or HOA dues.