For Jumbo Loans, an Unlucky 7

Large-Mortgage Interest Rates Rise, Thwarting Refinancing Plans in Area

Borrowers looking to take advantage of record-low interest rates may be out of luck if they need a home loan that exceeds $625,500.

The average rate on these jumbo mortgages hit 7 percent this week for a 30-year fixed loan, even as rates for much smaller loans plunged to 5.28 percent, their lowest level in years, according to HSH Associates.

"I just had a call from a guy this morning who wanted to refinance his $800,000 mortgage into a 30-year, fixed-rate mortgage," Larry F. Pratt, chief executive of First Savings Mortgage, said yesterday. "He couldn't believe it when he heard the rates he'd have to pay."

Jumbo rates spiked to unusual highs as mortgage markets were unraveling in the last half of 2007, creating a setback for borrowers in expensive housing markets like Washington.

The jumbo market came to a standstill after rattled investors stopped buying those loans. As investors turned away, some lenders raised jumbo rates and others stopped offering the loans. Some borrowers got shut out of the housing market and others lost a chance to refinance.

"The jumbo rates are at a great premium because there's no supply," said Pratt of First Savings, which sold $2 billion in jumbo loans to investors in 2007 but none in 2008.

As the mortgage crisis deepened, investors turned instead to smaller loans that Fannie Mae and Freddie Mac buy from lenders and then sell.

For years, those two companies only bought loans that did not exceed $417,000. Both enterprises were federally chartered, and investors treated their loans as if they were guaranteed by the federal government, making them a safer bet. Last year, the government seized control of Fannie and Freddie and made that guarantee official.

The government tried to help lower jumbo rates early last year to benefit borrowers in areas like Washington, where 20 percent of outstanding mortgages exceed $417,000, according to First American Corelogic. As part of an economic stimulus package, the government raised the limit for loans Fannie Mae and Freddie Mac can buy from $417,000 to $729,750 in some of the priciest markets.

The new cap expired on Dec. 31. A lower cap -- $625,500 -- took effect at the start of this year and anything above that amount now falls into the jumbo category.

The changes in loan limits created a three-tiered mortgage market, opening up possibilities for people seeking large loans to find better rates.

The middle tier falls between the old $417,000 limit and the new $625,500 cap. The average rate for those loans was 5.56 percent this week -- better than the jumbos, but not as good as loans for $417,000 or less.

Keith Gumbinger, a vice president at HSH Associates, said borrowers may secure a better rate if they can pony up more cash and push a larger loan below the $625,500 limit, and if they have strong credit and at least 10 percent equity in the home.

Borrowers also may find a lender willing to split the mortgage into two loans -- one for $625,500 and the other for the balance, Gumbinger said. But lenders have become squeamish about that arrangement, which has resulted in substantial defaults in the recent past.

If all else fails, borrowers in need of a jumbo loan may consider taking out a five-year adjustable-rate jumbo because those are cheaper, Gumbinger said.

For those who already have an adjustable jumbo, sit tight. If it's adjusting now, you may be getting a lower rate, he said.

Adjustable-rate loans are tied to various indexes. The most popular are the London interbank offered rate, or Libor, and the one-year Treasury index. If your loan is tied to the Libor, your rate could adjust to the upper 4 percent range, and if it's tied to the Treasury index, it could shift to the mid-3 percent range.

"But remember, that adjustable loan will keep adjusting," Gumbinger said. "The benefit may be fleeting."