Word: breakpoint
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Dates: during 1990-1999
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Most people will never seek a "jumbo" mortgage--one too big to be sold to Fannie Mae or Freddie Mac, the federally chartered agencies that buy mortgages in the secondary market and virtually guarantee the availability of home loans for working stiffs. The breakpoint is high enough--$240,000 this year--that the higher interest rates on loans of that size afflict only one in five buyers nationwide. And so what? They can afford it, right? Don't be so sure. In today's torrid housing market, prices in some regions are escalating far faster than personal income, shoving more...
Russ Marinello, a mortgage broker for Bay Counties Financial, says 80% of the mortgages he originates are jumbos--and no, it's not his specialty. The San Francisco area is unusually pricey. But jumbo creep is a broad issue. The breakpoint adjusts annually to match the rise in the national median home price, 5% last year. Still, in places where home prices are escalating faster than that, more buyers will be pushed into jumbos...
...which typically runs .25 to .5 percentage point above nonjumbo loans. That premium is the result of financing advantages enjoyed by Fannie and Freddie, who pass along lower costs to nonjumbo borrowers. The problem with this stealth socialism is that it does not take hot markets into account. The breakpoint should be scrapped. Critics would argue that it's a subsidy for the rich. But Fannie's and Freddie's advantages should work for everyone...
With rates near historic lows and jumbo rates relatively low compared to conventional mortgage rates, there's little reason to sweat this issue at the moment. Go for the jumbo if you can afford it. If you're just over the breakpoint, you could make a larger down payment to reduce your loan amount. But that money might be better spent in a stock fund. Another option is a piggyback structure, where you borrow just under the jumbo limit and take a second loan for the rest. That second mortgage comes at a hefty premium--maybe a couple of percentage...