Sunday, November 20, 2011

save money by refinancing with confirming loan + HELOC instead of a jumbo loan

There is a huge difference cost of the loan and the interesting rate for Jumbo vs Confirming. Here is one example for

Conforming Loan
Rates as of
Rate1 (%)
APR2 (%)Monthly Payment2
(Based on $250,000 loan amount)
30yr Fixed4.21
Jumbo Loan

Rates as of
Rate1 (%)
Monthly Payment2
(Based on $640,000 loan amount)
30yr Fixed4.75
Lender InstitutionInterest RatePrepay PenaltyAnnual Fee
Schwab Bank3.99%NoNo

Of course, if you have the cash to buy down to a conforming loan then the decision is pretty straight forward. However, there is another option. You can do "structured financing" and get two loans at the same time. Get conforming to the maximum amount, then get a second HELOC (home equity line of credit) for the remaining balance. Here is the break down to the pros and cons.

1) Save money on the interest based on the primary loan
2) Save money on the cost of loan (initial down payment)
3) Save money on the current interest for the HELOC (at this time and likely the next few years, the interest rate for HELOC is lower then 30 yrs fixed)
4) With Schwab - you have 10 years interesting only payment option so you can reduce your monthly payment in case of emergency.
5) With Schwab - you have 10 year for draw period so you can access the paid off principle in case of emergency

1) Extra paperwork. This is pretty minor, in case fact, with Schwab, they give you a discounted interesting rate if you applied for the 2 loans other.
2) Exposure to adjustable rate. This is a serious risk for long term, but most of HELOC has per annual interest increase limit, and life-time cap on the interest rate. If you very careful with your cash reserve, this is manageable risk. In fact, depending on how much risk is acceptable, you might want to reduce the fixed loan portion of the conforming loan and increase the HELOC portion to maximum your interest rate savings.

All in the all, the risk is manageable, and the saving is quite significant. My beef is that I haven't been told of this option. I refinanced many properties and many loans. I have used loan advisors with the bank, and 3rd party mortgage "experts". Not once, I been advised to take this option. When I saw the the difference between the jumbo and conforming, I racked my brain to think of ways to take advantage of this difference. I came up with this option on my own and asked around multiple banks to confirm this is indeed a viable option. I won't speculate if the sales agents were taking advantage of me, or if they were ignorant also. For this simple change in the application process, I would save tens of thousands of dollars over the life of the loan.

Either ways, this experience demonstrates one of my core belief. Nobody has your interest in mind except yourself. You must get educated on the key aspects any major decisions you made. You can't fully trust advisers, agents, Realtor, banker, CPA,  teachers, etc. You absolutely need to understand and expand your scope of knowledge. You might be able to depend on agents to do the legwork for you. However, you can't trust them to think and look out for your interests in a strategic way.

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