Jumbo Home Loans: How Payment Option Loans Qualify Million Dollar Mortgage Loans
The cost of new housing in San Diego County has more than tripled during the last 10 years. The San Diego Housing Commission reports the average price of a new home has jumped from almost $245,884 in 1996 to $861,759 in 2006. As property values in the area reach the million dollar mark, prospective homeowners face a new breed of loanthe jumbo or super jumbo mortgage.
Jumbo and Super-Jumbo mortgages do not conform to the Fannie Mae federal mortgage guidelines. Those guidelines limit the amount of mortgages at $417,000. Also known as non-conforming loans, these loans dont have to meet standard mortgage rules.
In an inflated housing market such as San Diego County, some homeowners need options to keep the monthly mortgage payment low, while purchasing the home they need.
An $850,000 home financed using a standard 30-year fixed rate mortgage, with 20% down, would come with a monthly payment of more than $5,000. If the price seems high, the mortgage industry has some options for prospective homeowners to keep payment lower.
A payment option ARM has an initial period of fixed rate interest, then the loan converts and the interest rate rises or falls according to one of the banking indexes, such as COFI, LIBOR or MTA. A built in margin is added to the index rate to determine the interest rate. These loans usually have four payment options each month, the standard 30-year or 15-year pay-off rate, the minimum payment option, and an interest only option.
The homeowner chooses each month how much payment they want to make. The minimum payment option doesnt pay all of the principal or interest, and actually adds to the balance of the loan, known as negative amortization. Sounds scary to some people, but if you make 5 years worth of minimum payments and your homes value triples, the equity could make up the difference.
Another option is the interest only loan. These loans allow homeowners to pay the interest amount only for a specified time periodthen the loan converts to a fully amortized loan. Again, if the homes value increases, the homeowner is in good shape. But if the homes value doesnt jump high enough, they could face some stiff payments when the loan converts.
