While having dinner a few days ago with the vice-president of a major bank, the question was asked: What is available for the affluent buyer that the average buyer doesn't even know exists. Here is what we learned.
The rules are changing, but not evenly. New banking regulations taking effect in January 2014 will make banks scrutinize buyers even closer. However, with tighter rules the more affluent buyers will actually get a better deal. Why? Leverage.
Leverage begins with a buyer's interest rates. For the first time in history, interest rates on jumbo loans (above $417,000 in most areas and $625,000 in higher-priced areas) are trending below rates on conventional loans backed by Fannie Mae and Freddie Mac. Historically, jumbo rates have been at least a quarter of a percent higher than conventional rates, peaking to 1.8 percent higher in 2008 but down to half-a-percent in November 2012. Recently, the interest rate for a jumbo 30-year fixed loan was 4.125 percent compared to a conventional loan at 4.25 percent. The disparity can be even more with jumbo adjustable rate mortgages -- 2.375 percent for a 5-year loan, compared to 3 percent for a conventional loan.
For a buyer, the upside to the interest rate differential is the monthly payment: A loan slightly above $417,000 has lower monthly payments than a loan for a slightly less amount. The downside is that a buyer needs a high credit score (780-plus) and a 20-percent down payment, instead of the typical 10 percent or less. However, under very specific parameters, the exceptional buyer may be able to obtain jumbo financing with only 15 percent down and without the private mortgage insurance typically required for the lesser down payment. As you can imagine, the credit score requirements are quite high, as are other requirements such as the debt-to-income ratio.
Leverage also works in the bank's favor. Since banks are now required to have more money on their balance sheets, they have more deposits than loans. So instead of selling jumbo loans on the secondary market, they can opt to "portfolio" the loan by keeping it on their balance sheets. Since the bank also sets the rate of a portfolio jumbo loan, there is more of an incentive to "adjust" the mortgage interest rate downward for preferred, low-risk clients.
However, leverage works best if more of a buyer's assets are with the bank than just the mortgage. Banks often cross-sell checking, savings, investment or other ancillary services to their clients. However, those who have a deeper relationship with their bank may benefit from more attractive loan, investment and deposit pricing. The more a client uses the bank services, the more the bank makes.
However, the incentive works both ways. Affluent buyers can shop around for better services to keep their money working for them. Perhaps it is a higher interest rate on savings that they want to keep liquid. Perhaps it is access to other loan options, such as security-backed lending, not available to non-bank clients.
A security-backed loan allows a prospective buyer to leverage eligible securities without cashing them in and potentially paying transaction or tax-related expenses. With the economy improving, the potential exists for investment portfolios to have substantially greater gains. By leveraging, a buyer can use a security-based line of credit as bridge financing for quicker access to funds to purchase a new home. Once their original home is sold, they use the proceeds to pay off the loan balance. This saves buyers all of the costs they would typically incur with a traditional mortgage and provides a low-cost, short-term financing solution.
In some real estate markets where multiple bids have become more common, a security-backed loan provides a buyer with "cash" to close, which can make a difference in getting the home. Once the buyer owns the home, they maybe able to refinance into a mortgage with potentially a lower interest rate than a non-bank client could get.
So, if you want to get that better deal:
- Protect your credit score. Strive to be at least above 720, but higher is better.
- Keep savings high and debt low. Having nine months, or greater, of savings in reserve eliminates the lender's concern you are over extending and can't handle even a small income disruption.
- Think of your entire financial portfolio, not the individual components. The more components you have with one bank, the greater the additional discounts they may give in reduced home interest rates. If they don't, find a bank that will.
Barbara and Clair Ramsey are local associate brokers specializing in residential real estate. Their column appears every month in the Daily News. Their email address is email@example.com.