There have been lots of changes in mortgage lending rules and practices since the Great Recession, but there’s one particular quirk that should be of interest to people home-shopping in the Charleston area’s more expensive neighborhoods.
In a reversal of pre-recession norms, the interest rates offered on mortgages for homes costing more than $417,000 are now often lower than rates for less expensive homes.
Based on interest rates I saw offered this week by several major lenders, the monthly payments on a loan for a $430,000 house could be lower than for a $415,000 house.
Now, a house in that price range is beyond the means of the typical family, but homes in that price range are common in parts of the Charleston area. And for those shopping in that price range, it’s worth knowing that the interest rate gap can give you an extra $10,000 to $20,000 in purchasing power, or possibly even more.
Here’s why this is happening, and why $417,000 is the magic number.
Loans for homes costing $417,000 or less — that’s the price of the home, not the size of the loan — in most parts of the U.S., are known as “conforming” loans because they meet the guidelines of government-sponsored financiers Fannie Mae and Freddie Mac. That means banks can originate those loans, and then easily sell them.
Above $417,000, you’re looking at a “jumbo” loan, and in years past it was common to pay higher interest rates for a jumbo loan.
“Lenders are less confident in their ability to resell this type of mortgage, so they will offset their financial risk by charging the borrower a higher interest rate,” says real estate website Redfin.
But lately, the reverse is often true.
“One main reason: Lending standards for jumbo loans tend to be more strict, with bigger downpayments required,” says Bankrate.com.
The important point here is that gap between interest rates for conforming and jumbo loans can have a tangible impact for people who happen to be home-shopping in roughly the $400,000 to $450,000 price range.
As I mentioned, in some cases a person could buy a house costing $15,000 more, but end up with a lower mortgage payment. Of course, they might need a slightly larger downpayment, because downpayments are a percentage of the home price.
Conversely, imagine that a buyer is looking at a $420,000 house, and talks the seller down to $415,000 — only to learn that they’ll be making larger monthly payments and paying higher interest as a result.
It’s just one of those odd quirks in the financial world.
Not every lender offers lower rates for jumbo loans than for conforming loans. You have to shop around for the best deal, like any mortgage borrower should.
And of course you’ll need a good credit score, typically a FICO score of 740 or better, to get the best rates.
Some lenders make it easy to compare interest rates for conforming and jumbo loans by posting all their rates online, in a list or chart. Other lenders make it difficult. The rates I referred to early in this column were from the websites of Capital One and Wells Fargo, which is the largest bank in the Charleston region.
My search for examples was not exhaustive, but the largest gap I found between conforming and jumbo loan rates was on Wells Fargo’s website Wednesday, for 7/1 adjustable-rate mortgage loans.
A 7/1 loan is a 30-year mortgage with a fixed rate for the first 7 years, and then the rate changes. It’s an option people may consider if they expect to move in 7 years or so, and want to minimize their monthly payments.
The interest rates quoted by Wells Fargo’s website were not the lowest rates I saw, but had the largest gap between conforming and jumbo loan rates — 3.5 percent for a conforming 7/1 loan, 2.75 percent for a jumbo mortgage. At those rates, someone with a jumbo loan could borrow $35,000 more, and yet have a lower monthly payment, than someone using a conforming loan.
That’s a huge difference, and one more reason to be aware of what happens with mortgage loans once the price of a home exceeds $417,000.