Q: My husband and I are looking to move from our current home into something more upscale. I know that mortgage rates can be higher for more expensive houses, but at what point does the price impact the mortgage rate?
A: What's called a jumbo loan is anything exceeding $417,500. Jumbo loans represent a greater concentration of risk for mortgage lenders, so they charge higher rates for them. The spread between jumbo loan rates and ordinary mortgage rates varies, but as of early March of this year it was 10 basis points on a 30-year fixed-rate loan. This assumes your good credit and a 20 percent down payment.
Keep in mind that the dollar figure defining a jumbo loan applies to the original loan balance, not the price of the house. So, if you do make a 20 percent down payment, you'd be able to buy a house for as much as $521,875 and without the original loan balance exceeding $417,500 (assuming that you also pay all the closing costs and expenses up front rather than finance them).
If you find yourself looking at houses in the neighborhood of that $521,875 figure, you'll have some interesting decisions to make. Ten basis points may not be a deal killer, but on a $420,000 loan it would add more than $6,000 to your total interest payments over the life of the loan. If you want to save that $6,000, there are a couple options to keep in mind. One is simply to look at $521,875 as the absolute ceiling you are willing to pay for a house. Having that kind of a hard ceiling could actually give you a little edge in negotiations.
Another option is to make a slightly larger down payment to bring the loan balance below the $417,500 threshold. If the numbers are close, it may only take a few extra hundred dollars in a down payment to save you more than $6,000 in extra interest.