Another reason not to have a big mortgage
I’ve always rejected the notion, made popular by personal finance guru Ric Edelman, that you should always carry as large a mortgage as you can. It’s a somewhat emotional issue and I won’t dive into all my reasons here. Suffice it to say, I am of a different school of thought. I believe you should not carry a large mortgage. Now I have yet another reason to say that.
According to a piece by the Wall Street Journal, rates for conventional, conforming loans (read: reasonable size ones) are their lowest since 2005. (I already knew that. We’re buying a new house and mortgage rates are of keen interest to me.) It’s a great time to refinance. But only if you have that type of loan.
See, very large loan (’jumbo loans’ in mortgage-speak) rates have not fallen like conventional ones have. Refinancing at attractive rates isn’t an option for anyone with this type of loan or those without very good credit.
The Journal alludes to the reason, but I’ll expand on it. Jumbo loans aren’t eligible for purchase by Fannie Mae and Freddie Mac, the quasi-governmental entities that essentially make the mortgage market. As a result, jumbo loan rates seem to be suffering a little bit more from the credit upheaval.
If you have good credit, decent home equity, and a conventional loan, now is a good time to refinance. Of course, if that’s you, you probably already have a darn good rate.
January 18th, 2008 at 12:49 am
When it comes to Equity Management Theory, there’s two schools of thought: (1) Leverage your mortgage to the hilt, and (2) pay of your mortgage asap.
I know many individuals who belong to the first school of thought! And earlier last year when Jumbo Mortgage Rates were similar to Conforming Rates, that was OK. But since our developing mortgage crisis, the fact is you don’t see the same garden variety mortgage rates. The premium spread is a good .75% (sometimes more) between conforming and jumbo. Not to mention the fact that loan amounts above $650,000 have very stringent underwriting standards.
It seems to me the old mantra “Cash Is King” will reign for some time and frankly I think I’m ok with that. I’ve always said that too many Americans were living beyond their means.