Consumer demand as a whole for refinancing has dropped with higher interest rates and this has impacted the once immune jumbo mortgage borrowers as well. In many housing markets across the country, jumbo mortgages exceed $417,000, and are usually higher than $625,500 in designated high-cost markets like San Francisco, Los Angeles, Bethesda or certain counties of the NYC metropolitan area.
Beginning in the first quarter of 2012 to January of 2014, the best market for refinancing was in jumbos which hit a peak origination percentage of 8.86% from a low of just below 4%, based on research from Black Knight.
On a national level, home prices increased 25% between January 2012 and April of 2014, as reported by the 20-city S&P/Case-Shiller Home Price Index.
Looking at sales data of new U.S. single-family homes this year, sales have slipped dramatically in June and the previous month’s figures was amended to reveal significantly less sales growth, indicating the housing market is still in a challenging period to regain some sort of momentum.
On Thursday, July 24, the U.S. Commerce Department reported that homes sales fell 8.1 percent, the biggest decline dating back to July 2013, to a seasonally adjusted yearly rate of 406,000 units. The sales pace in May was amended down to 442,000 units sold from the former figure of 504,000 units.
Cash buyers purchased 32.0% of all sales in June of 2014, slightly higher from 31.0% May of 2014, from 31.0% in June 2013. This means at some point a majority of these buyers may want to take cash out as interest rates are very low.
A shining star that has been a ongoing trend in the housing market is that luxury homes are still selling well. While the rest of the housing recovery continues to lag, $1 million plus homes were the only portion of the market to realize a sales increase from the prior year, based on data from the National Association of Realtors.
In addition, during those two years, many of the best-qualified jumbo borrowers who had interest-only mortgages opted to refinance at low rates to avoid having the loan reset to a higher payment.
Traditionally, jumbo mortgages had higher rates than conforming loans. This led some refinance borrowers to pay down their loan balance so they could qualify for a conforming mortgage with a lower interest rate.
Because the discrepancy between jumbo and conforming mortgage rates has pretty much went away, the motivation to refinance the instant a home owner’s mortgage balance falls to less than the conforming limit is very little. Additionally, to qualify for a jumbo refinance can still be challenging for less-qualified borrowers with debt ratios that exceed 43%. In years past, borrowers could have easily obtained these loans but with more rigid underwriting conditions it has ruled out more borrowers.
Listed below are things to take into consideration for borrowers seeking to refinance their jumbo mortgages.
If housing prices start to rise rapidly, houses may become an alternate ATM for home owners again. Once people have a certain amount of equity again they will be looking into cash-out options again.
Will ARMs lead the refinancing surge in the years to come? Mortgages that were made in between 2008 and 2009 exhibit the greatest rates of prepayment, so borrowers who have 5-year and 7-year adjustable rate mortgages will look to either sell their home or refinance it.