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Affordable jumbos: 40-year fixed rate, easy, qualifying, interest-only for 10 years


By Jeff Lazerson


What I think: If affordability and qualifying are hurdles to a jumbo loan, there is some good news following a new report from CoreLogic that saw an 18 percent swan dive locally in year-over-year home sales.

A new jumbo loan option eases borrowers into a permanent, fixed-rate mortgage by adding 10 years up front of lower interest-only payments, essentially making this a 40-year loan.

Here’s an example: Take a $750,000 loan amount at 5.25 percent interest only payment of $3,281. Now, compare that with the payment of $4,142 on a 30-year fully amortized rate of 5.25 percent. The payment difference is a whopping $861 per month.

The benefits are many. Let’s count the ways:

1) Although you do qualify based on a 30-year amortization, you can go as high as a 50 percent debt-to-income ratio or DTI (your total house payment and your monthly credit report type bills divided by your monthly gross taxable income). Most traditional jumbos go to a 43 percent DTI.

2) Self-employed borrowers can use average deposits over the most previous 12 or 24 months for income qualification purposes as an alternative to two years of tax returns that don’t provide enough net income.

3) Or, borrowers may be able to use the most recent year of tax returns (to avoid averaging the income over the most recent two years in the event the most recent year’s income was declining).

4) Asset depletion is allowed for boosting income qualifying. This means quantifying income from your bank accounts, stocks and retirement accounts.

5) You can add non-occupant co-borrowers to boost the qualifying income.

6) You can buy with just 10 percent down up to a $2 million loan amount. This loan can also be used for refinancing purposes. Max loan amount is $2.5 million.

7) You can go as low as a 660 middle FICO credit score.

So, let’s cut to the criticism about adding 10 years to the traditional 30-year mortgage. Yes, a standard 30-year jumbo mortgage runs about one-half-percent lower in terms of the interest rate at about 4.75 percent. That 4.75 percent amortized payment is $3,912 or $631 more than the 40-year interest only payment — but $230 less than the 30-year amortization of a 5.25 percent interest-only mortgage.

What’s important to digest here is that if you can qualify in the eyes of the traditional, 30-year jumbo lender and, within your own family budget, this interest-only loan is not for you.

If you are trying to boost your borrowing power, this is certainly something to consider. You have 10 years until the payment amortizes and you won’t have payment shock once the 30-year amortization schedule starts. And, yes you can pay principal sooner without penalty.

Unlike the five-year, seven-year or even 10-year interest-only loan, you don’t have the compressed amortization period of 25, 23, or 20 years remaining to sweat out that significantly larger payment.

And, of course, Uncle Sam is subsidizing you by providing mortgage interest deductions for your tax returns (for new loans up to $750,000). The principal paydown is never tax deductible.

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Jeff Lazerson - Mortgage Columnist since 2011