Comparing Two Attractive Mortgage OptionsTo avoid paying higher rates for jumbo loans, many consumers take out a conventional mortgage and fund the balance of their purchase with a home equity line of credit (HELOC). To help you figure out if that approach makes financial sense for your particular situation, here is a case study for you to consider.
Jumbo Or Combo?The limits for conforming or conventional loans are announced each year by Fannie Mae and Freddie Mac. For 2013, the most you can borrow without having to revert to a jumbo loan is $417,000 for a single-family home. Therefore, if you are buying a home and need a loan of $420,000 to pay off the existing mortgage, you will need to use a jumbo to cover the full amount. But there is another option. You could structure a combination loansometimes referred to as a piggyback loanby combining a conventional mortgage with a HELOC. In that case, you could borrow your conventional loan limit of $417,000, and simultaneously establish a line of credit worth at least$3,000. Combine the two amounts, and you have a total of $420,000, without taking out a higher-interest jumbo loan.
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HELOC ValueInterest on jumbo loans is usually at least half a percentage point or so more than that of conventional loans, so a combo can save you money. Rates on fixed rate, 30-year jumbos in February 2013 hovered around 4.19 percent, for example, compared to 3.79 percent for comparable conventional mortgages. Using the above example, the $420,000 jumbo, at 4.19 percent, will cost about $738,500, including interest, over the full 30-year payback period. But the conventional loan of $417,000, at 3.79 percent, will cost you about 700,000 or lessfor a total savings of close to $40,000. Meanwhile, the monthly payments on the conventional loannot counting extras like taxes and insurancewill be roughly $1,940, versus a jumbo mortgage monthly payment of around $2,050. You will also be charged interest on your HELOC, of course. But if you aggressively pay it off, using the savings you made by not taking out a jumbo, then you can eliminate it rather quickly.
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