5 Things You Need To Know About Jumbo Loans – Episode 133

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have bestselling financial author and president of Partners for Prosperity, Kim Butler with us today. And today we’re going to be talking about an article in the October edition of Money Magazine and it’s called The 5 Things You Need to Know About Jumbo Loans. Hi Kim, how are you? Very fine, Todd. Thank you much. And I’m very curious about jumbo loans because we have one, a lot of our clients do,

[00:50] and you know, they’re not a bad thing. It just means you’re over some arbitrary number. What is that number today? Do you know? It’s like high 400s. 417,000. Okay, low 400s then. So there’s some magic to that number. I don’t know how they came up with it. But tell us what else we are supposed to know about these quote jumbo loans. Well, number one kind of makes sense. And it’s that the housing prices have risen high enough that a larger and larger percentage of the population need to know and understand jumbo loans. Hmm. And why is that? What’s so special about them? What’s special about them is their heart. Well, I guess we’ll get to the other five points. But again, let’s see here, 18.9% of all loans are now jumbo loans.

[01:44] How about that? Okay. Okay. Very good. That makes sense to me. Yeah. Number two, they need to understand that it is tougher to qualify for. Sure. I’ll grant that. Anytime you’re looking at a higher and higher mortgage, that’s going to be harder to qualify for just like a $60,000 car loan is harder to qualify for than a $30,000 car loan. So far, Todd, what you’re sharing with me from money.com is not impressing me much. Keep going. It’s saying that you should resist some of the sweetest offers. It’s saying that there are 0% down loans, but that it is much makes much more financial sense to put 20% down than it does to take 100% loan. Hmm. Now that’s interesting. I wonder why they are saying that around a jumbo loan, but not saying that around

[02:40] a mortgage that’s under $417,000. To me, the money that you put as a down payment is money that’s locked up and potentially will never be free again until you either get a home equity loan, which not everybody can, and of course the banks can take away, or you sell the hosts. Now to me, that’s no different with a jumbo loan and a regular loan. And of course, we all understand that, yes, you often do have to put 20% down, but hey, if you can find a deal where it’s 0% down or 10% down, then that’s a better deal because you’re locking the less money up. I don’t know if they’re talking about maybe a higher interest rate with the no money down. I think they’re talking specifically about PMI. Ah, got it.

[03:25] Okay. So the private mortgage insurance, which you would have on a loan that had less than a 20% down, or we could express it the other way, a greater than 80% loan to value ratio, meaning a million dollar house, greater than $800,000 mortgage is going to require the private mortgage insurance PMI. So okay, fine. That’s legit. You know, that’s a cost that you have to take into consideration, but again, it doesn’t have anything to do with whether it’s jumbo or not, regardless of what loan you’re talking about. If you have a greater than 80% loan to value, you have to have private mortgage insurance. So Todd, you’re still not impressing me a lot with this money.com article. Try again. What’s the next thing?

[04:10] I would like an answer to that question though. Do you think it’s worth paying the PMI or should you put the 20% down? Oh, now that’s a good question. Now we can get at something. So that has to get looked at. I’m going to say gut reaction. A lot of times it absolutely is worth paying it. The real answer to the question though is going to come for knowing the alternative. In other words, if you’re not going to put 20% down and you are going to pay PMI, what are you doing with that money in another place? Now obviously a lot of people that are not putting 20% down, it’s not because they have another investment that they don’t want to take money from. It’s that they simply don’t have the money, period.

[05:02] So we could argue that yes, an over 80%, meaning a less than 20% loan to value mortgage is going to have an extra cost of this private mortgage insurance, but every time I’ve looked at the numbers carefully, it was usually pretty worth paying if I had some decent investments that were earning more than my mortgage. So a jumbo loan mortgage rate is what? I’m going to say 5.6 today. Do you know that number? Actually the average 30-year jumbo rate is 3.64. Okay. So you’re telling me, and I realize I’m beating on the messenger here. You’re telling me that a 3.64 mortgage, if I put more money down, then I’m essentially earning 3.64 deductible, but we’ll keep taxes out of the picture for a minute.

[05:59] And so I’m going to suggest that if I can find an investment or if I have money that is already invested at greater than 3.64, I’m better paying the PMI insurance rather than taking money out of a 6, 7, 8, 9, or 10% investment. I don’t think that’s too tough to do. To beat 3.64? I would take all the money I could get at 3.64. If they’d give me 25%, give it to me. Absolutely, because we know where we can earn 7. We know where we can earn possibly even a little more than that. Even if we just go to our cash position, we can earn at least equal to the 3.64, if not more like 4 or maybe even 5. And again, we’re not taking taxes into consideration. So yeah, I think we should vote for paying the PMI if that’s an option.

[06:57] And for everybody, it’s not going to be. Some people, the loan that they get is going to require 20% down. Okay, fine. There’s not a lot that can be done about that. Okay. Now, my next question, and again, these may seem like simple questions to you, but I guarantee you that there are listeners out there who are making these decisions and these are bankers out here that are making these recommendations that even though they seem ridiculous to you, the wrong decisions are being made. And that’s that you should pay your down payment big enough to bring your loan amount under the $417,000 so that you technically have a conventional loan versus a jumbo loan. And let me show you this. The difference between conventional and jumbo is 3.64 versus 3.52.

[07:58] You got to be kidding me. Say those numbers again. 3.64 versus what? 3.52 for a 30-year conventional. 3.64, 3.52, 3.64, 3.52. So what money.com article is saying is that for one fraction of a percentage, a tenth of a percent, which I guess we could actually analyze that number and get a more accurate one, we’re supposed to lock a whole bunch of money up. I get it, Todd. I know what’s happening. This article is helping the banks and the mortgage companies more. It’s not helping our clients more. That’s the answer, right? It sure doesn’t make sense to me that where I would put $200,000 or $300,000 down that could be, I mean, what is the lifetime opportunity cost of $300,000 down over 30 years?

[09:07] Yeah, this is absolutely mind-boggling to me. So here you have an article that’s supposed to be helping clients and they’re talking about, first of all, such a minute issue, if that’s really the difference, that they are wanting people to believe that this, quote, jumbo loan is so horrible because it’s going to charge you this so much greater interest rate and in the end, it’s a fraction of a percent and you said it so well. And that’s one of the biggest financial planning lies out there is people don’t pay attention to opportunity cost and what opportunity cost is, is a basic accounting or economic term that we all learned in high school and college and then promptly forgot and it’s what else could you do with the money?

[09:56] And so here you have a chance to pay one tiny, tiny fraction of a percentage high or for freedom. You pay a slightly higher percentage and you get freedom with your money and this article is trying to make it sound bad as if the banker is somehow taking something away from you by providing you this jumbo mortgage and I hear them called jumbo rate mortgages too, which is such a misnomer. You know, I think jumbo at 417 is issue enough and obviously there’s tons of our clients that have mortgages under 417. There’s nothing wrong with that either. But let’s please be clear that going after a jumbo mortgage if the value of your home is higher and you have the upper income is a completely common strategy, totally workable and doable

[10:51] and should be pursued because we want to have the highest legitimate loan to value ratio that we can because we know that we can save and invest our dollars greater than 3 point whatever, 3.5, 3.6. Even if jumbo mortgages went up to 4 or even 5 or even 6 percent, I would encourage the jumbo rate mortgage over the quote regular rate mortgage because of all of our principles of prosperity, control, use, flexibility, multiplication opportunities because if all you’re doing is building equity in your home, you cannot do anything else with those dollars. Now, I know there’s one more on there. Let’s see if we can save the day on this article. What is it? There’s one more part on 4 and then there’s two parts on 5,

[11:46] but the one part on 4 we want to hit is that they also recommend that a 30-year jumbo is 3.64, but a 15-year jumbo is 2.84. So they’re recommending using that by going with the 15-year, you could save quite a bit of interest. And they are correct. It will absolutely be less interest, but that does not mean that it will be less cost and this is one of the biggest financial planning lies out there is that a 15-year mortgage costs you less and this is a tough subject for people to get their arms around, but we have painstakingly proven that less interest does not mean less cost. In our book that’s available on Amazon and there’s an audio version available, but I got to tell you this is one of the books

[12:38] that I’m going to recommend you buy the physical book or you can grab it on Kindle. You’re going to actually want to see the calculators that prove beyond a shadow of a doubt, numerically that a 30-year mortgage is more efficient and actually has less cost than a 15-year mortgage. Now, I’ll say it again. A 15-year mortgage does have less interest, but less interest does not mean less cost and again, it comes down to opportunity cost and of course many people including the bankers and the mortgage brokers and whoever wrote this article do not take into consideration. Super. All right, let’s hit number five then. Number five has two parts. Part number one, make extra payments to get your loan below

[13:28] or down to the conventional level and part two is as soon as you can get below the conventional level, refinance to a conventional loan. Sure. So here we’re going to make extra payments into something that we can’t control and then we’re going to go through the entire hassle of refinancing to save what was that difference again? 3.6. It was 0.12 difference. Oh, thanks. I’m glad you did the math. I was, yeah, I was trying to get my arms around and couldn’t do the calculation in my head while I was talking. A 0.12% difference. So let me get this right. They are recommending that you put a whole bunch of money into a place that you cannot get at it, which is what home equity is. I know there’s home equity lines,

[14:14] but we cannot rely on those always to save 0.12% and then you refinance, which of course is going to cost more money and be the biggest hassle. It’s amazing today what the banks require and then you’re going to have this quote better loan. So this is all the same discussion. Whether you have a 15-year mortgage or whether you are paying extra principal payments or making an extra large down payment, the issue is all the same. You may save some interest, but you do not save cost and worse when you add opportunity cost into the discussion. Again, opportunity cost is what else could you do with the money? You are setting yourself up for a less efficient personal economy than if you save those dollars outside.

[15:04] So if you have extra money to make a down payment, save it outside your mortgage. If you have extra money to make extra monthly payments, save it outside your mortgage. You will be miles ahead because that is money that you control that is completely liquid that you can use for whatever you want. And by the way, you can still make it act like equity. Equity means that even though we’ve borrowed against it, it keeps on growing. The difference between equity in a house and equity in, for example, cash value of life insurance is that cash value of life insurance grows for sure. Equity in a house may or may not grow. We are absolutely potentially in the latter part of the year 2016 when we’re recording this,

[15:48] ripe for another real estate correction. And I’m so sorry that that’s the case, but we did not learn our lesson in 08 and 09. And so we may have home equity being chopped in half again. And of course we may have home equity lines being pulled again if we don’t get ourselves straightened out here in the next, I don’t know how long. I don’t have a crystal ball, but I know for sure that we’re doing some of the exact same things that we were doing in 08 and 09. Clearly having not learned our lesson as an economy. So please put your money in places that you can control, which is not equity in your home, no matter how you do it. And whether we’re thinking about an extra down payment or we’re thinking about extra monthly payments,

[16:34] if that number, let’s just say $100,000 and there is a disruption of the economy that could affect your income. One thing about jumbo loans is they do all come with jumbo payments. Think how many of those payments could be made with that $100,000 while you’re transitioning through the next economic downturn versus that $100,000 in home equity that could disappear. We had the valuation of your house going down or the banks tightening up their lending. It would be so nice to know that you had 10 years worth of house payments in the bank versus equity in your house and no money to make the payment. Absolutely. The money in the bank is the peace of mind and we are all seeking it. And so the more money in the bank, the better.

[17:26] And whether you call that bank a life insurance company or an actual physical bank or a credit union, that’s where your control is. That’s where your liquidity is without a doubt. Super. Well, all in all, not too impressed. I guess we can say that other than number one, you disagree with all of them. Yep. Sorry, Todd. Like I said, I know I’m shooting the messenger, but it’s a sad state that when an article is put out like that, it has weight in it because of the source. And our clients, thankfully, are realizing, dig a little deeper, look at who that author actually is and then decide for themselves, is this article written to protect the banks and the brokerages that provide mortgages or is it written to protect you?

[18:13] Got it. Well, this is No BS Money Guy, Todd Strobel. Special thanks to Kim Butler and we’ll talk to you all again soon. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.