During the real estate boom, many consumers were faced with the choice of a jumbo mortgage or a conforming first mortgage and a second mortgage or home equity loan to finance their purchase. At the time, many consumers chose the first and second mortgage option because they were able to obtain a lower blended interest rate and they didn’t have to pay mortgage insurance or PMI. As the economy took a turn for the worse, many of those consumers are now regretting that decision.
The Case for the Jumbo Mortgage
Over time jumbo mortgage rates have fluctuated significantly. When their rates were close to conforming mortgages, consumers had a very easy choice. Jumbo mortgage payments were significantly cheaper than a first and second mortgage. As the rates widened away from conforming loans, PMI and monthly payments became more of an issue leading consumers to choose first and second mortgages.
In today’s environment, jumbo mortgages have several clear advantages. First, the ease of refinancing/modifications is a big positive. In these challenging times only dealing with one financial institution makes modifying a loan exponentially easier. Every bank has a different policy and responds to consumers in a different manner. Most consumers can work really hard at one bank and reach an agreement. Throwing in a second bank makes a refinance or workout virtually impossible.
Second, one bank facilitates a much easier short sale process. With so many loans underwater today, short selling has been the predominant method of housing sales in many communities. This process is daunting to the most vigilant borrower. Adding a second bank offers a second opportunity for rejection and worse, pits the two financial institutions in competition for the same dollars. The $100+ savings every month is not worth the hassle or headache when a borrower is most in need of a modification or debt reduction.
Modifying a First/Second Mortgage
Consumers that opted to save $100+ per month by using a first and second that now need to refinance face an uphill battle. Many times calling one institution will simply lead to them suggesting a call to the other. A borrower’s best hope is to work with the conforming first mortgage and refinance to a jumbo loan. This will allow that borrower to pay off the second loan and only require the cooperation of one bank. In many situations the loan to value will be untenable for banks, however.
The economy downturn put the debate to rest. Jumbo mortgage are much easier to modify, short sale and refinance. First and second mortgages represent a challenge when dealing with one or multiple institutions because it represents more moving pieces. Banks rarely want to throw good money after bad, so if they have one conforming mortgage and one non-performing second, they have very little incentive to refinance the loan. Going forward, consumers should lien towards jumbo mortgages from one institution rather than a first and second mortgage. Furthermore, when considering a first and second mortgage make sure there is only one bank involved.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
