Jumbo fixed-rate are back!

29, 2013, 7:02 a.m. EDT

Fixed-rate jumbo mortgages make a comeback

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By Anya Martin, MarketWatch

Just a year ago, a 30-year, fixed-rate jumbo mortgage was hard to find in some high-price markets. Now, many lenders are offering fixed jumbos—with very competitive rates.

Mathew Carson, a mortgage broker at First Capital Group, said several of his clients in the San Francisco area recently refinanced their jumbo adjustable-rate mortgages (ARMs) to a 30-year-fixed jumbo loan, especially for loan amounts less than $1 million.
“People are of the philosophy that it is unlikely they will see interest rates this low in the future,” Carson said. “If you have an ARM that is maturing a couple of years from now, you could potentially be in a world of hurt.”
During the mortgage crisis, the vast majority of jumbos were adjustable-rate mortgages and hybrid adjustable-rate mortgages, which started at low fixed rates and switched to adjustable interest rates at the end of a set time period—typically of five, seven or 10 years, said Keith Gumbinger, vice president at HSH.com, a mortgage-information website.
Now, with real estate rebounding, there has been a comeback of the secondary market, in which mortgage-backed securities are sold to investors. Since this lessens the risk to lenders, more mortgages are being offered with fixed rates.
But with the renewal of the secondary market for jumbo mortgages, more lenders today are willing to offer fixed rates. Packaging the loans into mortgage-backed securities that are sold to investors can lessen the risk to lenders.
Interest rates for 30-year, fixed-rate jumbo mortgages were 3.87% on May 10, significantly lower than 4.63% in April 2012, according to the Mortgage Bankers Association.
Still, hybrid ARMs remain attractive to borrowers with other financial priorities, Gumbinger said. Sample late-April interest rates were 2.65% for a five-year hybrid ARM, 2.85% for a seven-year hybrid ARM and 3.24% for a 10-year hybrid ARM, he added. “Wealthier clients may be better able to protect themselves against the future risk of higher costs,” he said.
Seattle-based Sound Community Bank just opened a loan office in the affluent Madison Park suburb to increase its capacity to offer jumbo mortgages, but decided to stick with five- and seven-year ARMs and a 15-year fixed-rate product. “The borrower gets a low interest rate, commensurate with the interest of a conforming loan, and the bank mitigates its risk to some degree,” said Laurie Stewart, the bank’s president and CEO.
Sound Community Bank has heard a lot of enthusiasm for its limited offerings, which are in tune with most home buyers who no longer keep their homes as long as they did in the past, Stewart said.
The general wisdom when deciding between an ARM and a fixed jumbo is the same as with any mortgage, Gumbinger said. Answer the question: How long are you going to stay in the house? If the length of time is near or less than the length of the ARM, then you’ll save money with the ARM, he said.
Borrowers should keep in mind that some lenders will push hybrid ARMs because they stand to reap a higher return on investment, Carson said.
With a five-year hybrid ARM, for example, the borrower will either pay off the loan at the end of the five-year period, allowing the bank to reinvest its money, or will continue to pay back the loan at a fixed rate that is higher.
What to consider when deciding between a fixed or ARM/hybrid-ARM jumbo mortgage:

• Potential for higher yields elsewhere: Lower ARM interest rates and monthly payments can free up cash to purchase stocks and other assets, Gumbinger said.
• ARM expiration date: Another option is to refinance to a hybrid ARM to move its conversion to a fixed rate to a later date, Carson said.
• Level of risk tolerance: Some borrowers just may be more comfortable with the lower risk of a 30-year, fixed-rate mortgage, especially with so much money on the line, Carson said. He also advises considering life changes that could affect loan qualification in the future, such as shifting from a traditional employer with a salary to self-employment.