Strategies for taking on those whopper home loans
Can you guess which part of the world boasts the highest of high-end mortgages? If you said Manhattan Island, you’re absolutely right. With over 1.5 million people living on 20 of the funkiest square miles in the world, it’s no surprise that mortgages there are through the stratosphere. While the median house price in the rest of America is about $225,000, Manhattan brags a figure around $925,000. Based on a 20-year mortgage at 6 percent interest, that’s $6,400 every month - just to pay for the roof over your head!
Twenty-five years ago, if you wanted to own a really high-end home - say, one costing three quarters of a million dollars or more - chances are you had to be wealthy enough to buy the property outright. Today, thanks to skyrocketing housing prices across the country and our insatiable appetite for monstrous McMansions, high-end mortgages (also called “jumbo mortgages”) are far more common. As greater numbers of Americans jump on the jumbo-mortgage bandwagon, banks and other lenders are rolling out new services to meet the demand.
The two largest secondary mortgage lenders, Fannie Mae and Freddie Mac, set the benchmark for what constitutes a standard mortgage, and therefore what constitutes a high-end mortgage. In 2006, that limit was $417,000 for a home in continental America (and $625,000 for Alaska, Hawaii, the U.S. Virgin Islands and Guam). In other words, if you want to own property that costs more than that, you’ll need to seek out a secondary lender to cover the remainder of the loan.
When you venture into jumbo-mortgage territory, there are a few key points to keep in mind:
- High-end mortgages are riskier business for the lender, so you’re typically going pay a higher interest rate on the part of the debt exceeding the $417,000 limit - to the tune of 0.25 to 0.5 percent.
- This trend of “zero down payments” on starter or lower-end homes does not apply to the jumbo mortgage. Most lenders will require you to put down at least five percent before they approve the loan.
- Some lenders are willing to offer abnormally large payment periods for your abnormally priced house. You can look into a 40- or even a 50-year amortization to reduce your monthly mortgage payments. Interest-only mortgages are also available to some.
Are you ready for a high-end mortgage?
Taking on substantial amounts of debt is a big decision and not one you should take lightly. Thankfully, sweeping improvements to credit-score calculations have allowed lenders to pinpoint more accurately those applicants who can handle high-end mortgages and those who can’t.
If you get approval, there are ways to ensure your budget can bear the brunt of a jumbo mortgage. These include:
- Putting down the largest down payment you can afford. Back in the day, you typically needed 15 percent before you could buy a house; it wouldn’t hurt to apply this traditional figure to your high-end mortgage.
- Making sure your monthly payments don’t push your debt-to-income ratio into dangerous territory. If your jumbo mortgage moves this ratio (i.e. the monthly payments for all your debts, including your mortgage, in relation to your monthly take-home pay) up over 45 or even 50 percent, you may begin to feel the budgetary squeeze.
- Ensuring your other debts, including student loans, car payments, and credit card bills, are well under control.
Minimizing your monthly mortgage payments with a longer payment period or even interest-only payments.