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Personal Business: SMART MONEY
EASING THE BITE OF JUMBO MORTGAGES
With real estate prices at their lowest level in years, now is a good time to scout out a deal on a dream house. But if you need to borrow more than the $191,200 limit set by most banks for conventional fixed-rate mortgages, the cost can be prohibitive, even with today's low mortgage rates. So-called jumbo mortgages typically carry interest rates half a percentage point higher than conventional loans.
Recently, a handful of lenders, including Merrill Lynch, Bankers Trust, and Boston Safe Deposit & Trust, have started offering an alternative: prime-rate-based jumbos. These loans offer two advantages over regular jumbos. Their rates are pegged to the interest rate that banks charge for business loans--currently 8.5%. And 100% of the payments you make in the first 10 years is tax-deductibleinterest.
BETTER RATIOS. At today's prime rate, monthly payments on a $350,000 prime-based mortgage are $2,479, a savings of $464 over a conventional fixed-rate jumbo's 9.5%. You could save as much as $12,566 during the first 12 months if, say, the regular jumbo carried two points and the prime-based jumbo was point-free, as is often the case. Amortization of principal doesn't begin until the 11th year (though you have the option of prepaying the principal). With a regular $350,000 jumbo, on the other hand, 94% of the first year's payments would go toward interest and 6% toward principal. The ratio would be 91%/9% in year 5 and 86%/14% in year 10.
There is a catch. Prime-rate loans are aimed at six-figure earners who have substantial investments outside real estate. Some lenders also prefer customers who have enough assets to be able to pay off the loan quickly if the economy takes a dive. Lenders want that assurance because prime-based loans are variable, with monthly payments changing every six months to follow the prime. Since 1986, the index used for these loans has floated between 10.5% and 7.5%. But in 1981, the prime soared to 20%. If something similar occurs, bankers don't want to get burned by borrowers who can't repay.
Many borrowers prefer the predictability of a fixed-rate loan, says Cary Geller, an accountant with Tofias Fleishman Shapiro financial planners in Cambridge, Mass. But "at the high end of the market," says Geller, "it's hard to find a competitive fixed-rate product."
Prime-based jumbos may be ideal for those who need only a short-term mortgage and want to maximize tax savings. They might also appeal to borrowers who want to refinance high-interest, fixed-rate mortgages. Either way, it takes some of the sting out of the cost of that dream house.TWO WAYS TO PAY OFF
A $350,000 HOME LOAN
INTEREST RATE 8.5% 9.5%
POINTS 0 $7,000 *
MONTHLY PAYMENT $2,479 $2,943
FIRST-YEAR PAYMENTS** $29,750 $35,316
*Two points**Not including points
DATA: BOSTON SAFE DEPOSIT & TRUST CO.
EDITED BY AMY DUNKIN Geoff Smith