Jumbo mortgages: The best deals

Jumbo mortgages: The best deals
Rates on big mortgages are unusually high. Here are some tips for bringing down the cost of borrowing to buy that expensive house.
By Jon Birger, senior writer

(Fortune Magazine) -- For many house hunters, these are good times. Home prices have fallen 10% or more in once-hot markets, and interest rates on mortgages of $417,000 or less have sunk to their lowest levels in four years. Today a family with solid credit and enough cash for a 20% down payment can lock in a rate of only 5.9% on a 30-year mortgage, according to Bankrate. Thank you, Ben Bernanke!

The story is much different for well-to-do homebuyers - and not in a good way. These are dark times for jumbo mortgages - home loans of more than $417,000 - which federally chartered mortgage guarantors Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) are not permitted to purchase. Spooked investors have stopped buying bonds created from bundles of jumbos or, for that matter, from pools of any other type of mortgage not guaranteed by Fannie or Freddie.

Consequently, banks have cut way back on lending, tightened standards, and hiked rates on jumbos, all of which they now must hold on their own balance sheets. Even for wealthy borrowers with sterling credit and enough cash for a 20% down payment, the cost of fixed-rate jumbo mortgages is now upwards of 7% for a 30-year loan.

The positive news - at least for those seeking a smaller jumbo mortgage - is that Congress feels your pain. As part of the economic stimulus bill signed by President Bush last week, the limit for Fannie and Freddie mortgages will be temporarily raised from $417,000 to $729,750.

In the meantime, there are some things you can do to reduce your mortgage costs without any help from Congress.

Consider a 7/1 jumbo ARM

You can cut your monthly payment by choosing a hybrid loan. Today you can get a "7/1" mortgage, which offers a fixed rate of 5.9% for seven years, then adjusts annually. Why are these loans cheaper than 30-year fixed mortgages? Michelle Ashworth, a top mortgage executive with Wachovia, says that banks prefer to hold ARMs because the interest rate risk is easier to hedge. Some lenders are so eager to sell ARMs that they're now charging regular rates on smaller jumbos. At ING Direct, for example, the lowest rates apply to all 5/1 or 7/1 ARMs less than $500,000.

Take out a second mortgage

Say you need to borrow $800,000 to finance the purchase of your new home but intend to repay $400,000 when the sale of your old home goes through. You'd be best off taking out two home loans - a $417,000 30-year fixed-rate mortgage at the lower conforming rate and a home equity line of credit for the balance. Consult a mortgage broker to help you mix and match. Better yet, see whether you can establish a relationship with your bank's private-banking department - that usually requires $1 million in assets, but the amount may be lowered for someone with big earnings potential (a newly minted partner at a law firm, for instance). "Private bankers usually have amazing deals, especially in this market," says mortgage broker Christopher Minardi of New York-based Manhattan Mortgage.

Hit up Mom and Dad for a small loan

Let's say you're buying a home for $550,000. You've made a 20% down payment, which leaves you with $440,000 to finance. Basically, $23,000 is all that stands in the way of getting a 30-year conforming mortgage at 5.9% instead of a jumbo at 7%. The rate gap is so large it may be worth swallowing your pride and hitting up your relatives for a modest loan - especially if you can pay it back quickly. Pitch it as a win-win: With one-year CD rates down to an average of 3.5%, you could pay them 5% and still beat their bank.

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