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Higher-end clients will fit into the “jumbo” category when obtaining a home loan.

I’m not really sure where the name originally came from, but it is so-called because the amounts borrowed are higher than the prevailing conforming loan limit.

In greater Austin, the conforming loan limit is $417,000, as established by mortgage giants Fannie Mae and Freddie Mac. Historically, the jumbo rate has been higher than the conforming product, due to the sheer number of conforming loans originated compared to the jumbo category.

Yet there’s a twist in the current rate environment and something that I haven’t witnessed in all my years as a loan officer.

Our fixed jumbo rates are actually lower than their fixed conforming brethren.

Not by much, mind you, but lower still.

For instance, while a conforming 30-year loan might be available at 4.25%, a 30-year jumbo is 4.125%. And jumbo clients can save and qualify for more with a 7/1 hybrid at 3.125%.

Let’s do a little math together to see how jumbo offerings compare on say a $700,000 30 year loan. The principal and interest payments work out to:

  • 30 year fixed @ 4.125% $3,392/mo
  • 7/1 hybrid @ 3.125% $2,998/mo

The savings are rather dramatic with the hybrid lower by $394. And over the course of the next five years, that’s more than $23,000 in saved interest. That’s a lot by any measure.

Is there a downside to a hybrid?

The 7/1 loan, just like all hybrids, is an adjustable rate loan at its heart. After seven years, the loan changes to an adjustable rate mortgage for the next 23 years. That means the 3.125% won’t be fixed but is subject to change. Yet due to the consumer protection caps on the program, the rate may never be higher than 8.125%. Even in a worst-case scenario, the annual increase after seven years is limited to 2.00% from the previous rate.

The 7/1 hybrid isn’t for everyone and may not be the absolute best choice for buyers intending to keep the mortgage long term. But for your clients leaning in the jumbo category, this just might be a once-in-a-lifetime event.

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