Want to get a good rate on a new mortgage? Two tips: Be wealthy, and borrow more.
For the first time in recent memory, lenders are offering well-heeled buyers large “jumbo” mortgages at the same — or even better — interest rates as smaller loans. The trend is helping fuel a resurgence at the high end of the real estate market. Sales of homes priced $1 million or more are soaring as lower-priced properties lag, accentuating the uneven nature of the economic recovery.
The share of homes selling for at least $1 million fell when the 2008 financial crisis hit, but it recovered faster than the rest of the market during the past two years. It now hovers at a level last seen near the housing boom’s peak in 2007, according to research firm CoreLogic. The rates help, and so does a robust housing market. The number of homes sold for $1 million or more climbed 8 percent this year while those at every other price point combined fell 4 percent, according to the National Association of Realtors.
The sales at the higher end are clustered in a few pricey areas, including the Washington region, where purchases of expensive homes also have rebounded to near pre-crash levels, according to a Washington Post analysis of local sales adjusted for inflation.
One in eight single-family homes in the District sold for at least $1 million in each of the past two years — just below the 2007 peak level, the analysis found. While $1 million may not sound like a lot of money in the D.C. area, it is double the region’s median price, according to Real Estate Business Intelligence, a subsidiary of the local multiple listing service.
Banks are helping tilt the market. Burned by the reckless loans of the housing boom, many lenders are turning away potential buyers who lack stellar credit and hefty down payments, and chasing after affluent home buyers by offering favorable terms and interest rates.
“Many people are finding out by accident that they can often get a better rate on a $700,000 mortgage than a $400,000 mortgage,” said Guy Cecala, publisher of Inside Mortgage Finance. “The opportunities for wealthier borrowers are now better than they’ve been in a decade as far as rates and terms.”
Kathleen McEnerney and her husband sold their D.C. condominium last year to buy a house in Potomac, Md. for slightly more than $1 million. The proceeds from the condo sale would have covered the cost of the new home, McEnerney said. But instead of paying cash, the couple decided to take out a jumbo loan.
The cheap rates were too good to resist, said McEnerney, a director at a local utility. The couple got an adjustable-rate mortgage with a 2.875 percent interest rate. Another draw: the tax benefits.
Homeowners can deduct interest paid on mortgages of up to $1 million from their federal taxes as well as the interest paid on up to $100,000 of home equity debt.
“It’s the first time in a long time that we’ve had a mortgage,” McEnerney said. “But it was a matter of freeing the money up to be able to invest it in other types of assets.”
Among lenders, competition to lure well-heeled borrowers like McEnerney is fierce.
Overall mortgage lending by dollar amount plummeted 44 percent in the first three quarters of the year compared with a year ago, mostly because a recent multi-year refinancing craze has fizzled out, according to Inside Mortgage Finance. The industry is looking to drum up business elsewhere, and they’re turning their attention to home purchases.
But they’re being selective, and catering to jumbo borrowers with lots of assets, cash, and high credit scores. The dollar volume of jumbo lending now makes up 20 percent of all home purchase loans, the highest level since 2002, the trade publication reported.
Lenders are holding onto those mortgages instead of selling them to investors, confident that the loans are of solid quality, said David H. Stevens, chief executive of the Mortgage Bankers Association. “Banks are much more comfortable in the wealth market,” he said.
Hanging onto the mortgages puts the lenders at greater risk if the borrower defaults, but it also gives them more leeway to offer cheaper rates and more flexible terms, said Cecala from Inside Mortgage Finance. In many cases, the rate on jumbo loans is now lower than the rate on smaller loans backed by mortgage giants Fannie Mae and Freddie Mac — and perhaps what’s even more surprising is that it’s been that way through 2014, he said.
Traditionally, the reverse has been true, with rates on Fannie and Freddie loans at least a quarter of a percentage point lower than jumbos. But those smaller loans are also more expensive now because Fannie and Freddie have raised certain fees that are reflected in the interest rates.
These jumbo loans are defined differently across the country. In most parts of the United States, jumbos are loans that exceed $417,000. But in D.C. and a few other expensive markets, they are loans in excess of $625,500.
The average rate on a 30-year, fixed-rate mortgage of $417,000 or less was 4.17 percent last week, and the rate on larger loans was 4.13 percent, according to a survey by the Mortgage Bankers Association.
To get the best rates, buyers must bring plenty of cash to the table. Todd Wood, a builder in Bethesda, said he’s seeing that firsthand with his customers, many of whom are selling their first homes to buy newly built ones in the $1.5 million to $2 million range.
“They’re putting down 20 percent or more. I’m even seeing down payments of up to 50 percent,” said Wood, founder of CastleWood Builders. “But even if you put down 50 percent, you’re not going to get the best rates or the most favorable terms if you don’t have a good credit score. And you might not get the loan at all. I’ve seen that happen.”
In the Washington area, the greatest recovery has been in Arlington, where more than 1-in-5 single-family sales are for at least $1 million, just below the peak reached in 2005. The market share of pricey homes in Arlington dropped by half during the housing bust, falling even faster than the market as a whole. But the share has grown steadily in the past four years.
Alexandria, Montgomery County and Fairfax County have all rebounded, and between 7 percent and 10 percent of their sales are now in the top range.
The local market is just as strong, if not stronger, at the very top of the high end — homes that sell for $3 million or more, said Nancy Itteilag, an agent at Long & Foster/Christie’s in the District. Itteilag projects that 152 homes will be bought at that price range this year if the current pace of sales continues, up 30 percent from last year.
After crunching numbers from local listings, Itteilag also found that the average price for the luxury homes sold in the District and nearby suburbs is up this year compared with last year: $5.2 million in the District, $4.5 million in Maryland, and $3.7 million in Virginia.
Those buyers typically aren’t concerned about mortgages, Itteilag said. They can borrow against their assets, such as their stock portfolios, at phenomenal rates.
“Your luxury market is pretty much an all-cash market,” Itteilag said.
But even buyers who can afford to pay all cash sometimes turn around and get a loan later to take advantage of the low interest rates and tax benefits, industry officials said.
MUFG Union Bank, which specializes in jumbo loans on the West Coast, has a program that offers jumbo loans to cash buyers after they’ve lived in a home for six months.
James H. Francis, managing director of consumer lending at MUFG Union Bank, said he believes this kind of deal has become more popular in competitive markets — such as New York, Silicon Valley and Beverly Hills — where buyers offer all-cash to stand out in a crowded field of bidders, and take out a mortgage later.
“It gives buyers the best of both worlds,” Francis said. “They can have an attractive offer in a competitive situation, but then they don’t have to keep all their money tied up in their home.”
Alice Crites contributed to this report