New rules from the Consumer Financial Protection Bureau, which went into effect on Jan 10th, will alter the financial landscape for jumbo loans.
Wealthy home buyers will see their options limited when it comes time to take out a jumbo loan because of the new regulations. Moreover, other regulatory actions could potentially make access to credit more difficult for jumbo loans. However, despite these changes, there are still a number of positive developments that higher end borrowers should keep in mind as they’re shopping for a home. But let’s start by going over some basic facts about what constitutes a “jumbo loan.”
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What Are Jumbo Loans?
Jumbo loans are like most other types of loans, but they share one unique quality that other loans don’t. By definition they are for amounts which exceed conforming loan limits. In most areas of the country loans are considered “conforming” if they are for amounts less than $417,000. However, in certain parts of the country where real estate is more expensive like in New York, the conforming loan limit is around $625,000.
Jumbo loans don’t typically perform well during economic downturns, but that changed last year as the housing market continued to recover. There was a resurgence of jumbo loans in 2013 as wealthy individuals took advantage of the historically low rates for home loans. In fact, it was even possible last year to get a jumbo loan with a lower interest rate than a 30-year fixed home loan.
What Changes Will Come This Year?
One of the major changes in place is the elimination of interest only loans. For these types of loans, the borrower only pays the interest of the loan for the first few years without making any payments towards the principal. This rule applies to all loan types, not just jumbo loans.
Home buyers looking to take out a jumbo loan can expect to find lower down payment requirements from last year. For example, in 2013 Wells Fargo required borrowers to put down 20% of the value for a jumbo loan. But then they began accepting down payments for just 15% of the total value of the loan. Bank of America went ahead and made the same change. Some analysts have predicted that certain banks may even start accepting 10% down payments.
For those who have millions to invest it may actually make sense to make a low down payment on a home loan, even if they have assets to make a larger down payment. The money that can be used for the down payment could be invested and yield a considerable return. This is opposed to pouring the money into the house in which case the lender would make money off of it.
Lastly, interest rates on jumbo loans are expected to remain low this year in comparison to conforming loans. Moreover, the pace at which rates increase for jumbo loans is also expected to be slower than other types of loans. As in times past, adjustable rate mortgages on jumbo loans will continue to be cheaper than fixed rate mortgages for jumbo loans. But borrowers should keep in mind that adjustable rate mortgages may be cheap at first, but that variable interest rate could well go up as the market fluctuates.
