Fallout from the subprime lending crisis is pushing up rates on some large loans. If you're taking on debt greater than a certain size to buy or refinance, you'll feel the sting.
One reason rates are rising is because of a retreat by major lenders.
On Thursday, troubled Countrywide Financial (NYSE:CFC) CFC -- which makes nearly one in every five U.S. home loans -- said it will cut its jumbo loans to 10% of its home lending. That's down from 50% not even two months ago.
Jumbo loans are those of more than $417,000 that aren't guaranteed by the government. The $417,000 threshold is set by the Office of Federal Housing Enterprise Oversight.
Conforming loans are $417,000 and smaller and meet certain borrower qualifying tests. The government often guarantees them, which fosters mortgage market liquidity.
Jumbo rates have risen the most. That's the case despite sound fundamentals for most of those big borrowers' ability to pay on time.
"This (industrywide increase) is a knee-jerk reaction (to the crisis)," said Greg McBride, senior financial analyst at Bankrate.com.
And the increase has affected a broad array of borrowers. In many areas, middle-class buyers need jumbo loans.
If you are planning to borrow more than $417,000 to buy or refinance a home, try to wait, McBride says. Rates on jumbos may fall once the mortgage market steadies.
The subprime crisis was caused by nonconforming, usually smaller loans. Some subprime borrowers were able to provide scant documentation of income.
Others got loans without being required to pay much if anything for down payments.
Still, things often worked out due to rising home prices. If a borrower could not make his payments, he could sell his home and end up with more than enough to repay his loan.
There were relatively few delinquencies before. But recently home prices have been flat or down. More subprime borrowers who were forced to sell couldn't pay their debt.
The latest Bankrate.com survey found that jumbo mortgage rates averaged 7.43% for 30-year fixed-rate loans, going into Friday. That's the highest rate since April 2002.
But 30-year conforming loans averaged only 6.68%.
The spread between jumbo loans and conforming loans has jumped to 0.75 percentage point 18om 0.28 just three weeks ago. That's larger than normal.
So borrowing costs for people seeking to buy expensive homes are up.
Rates should come down, McBride says. That would happen when investors realize that default rates on jumbo loans have not risen from historic levels.
What if you just can't bear to delay purchasing that dream mansion you've been eyeing?
Money for loans is still available. It just costs more. Go online to find the best deal. Bankrate.com, for example, shows that in Los Angeles County the annual percentage rate for a 30-year fixed $500,000 no-points mortgage now ranges from 6.644% (Avant Lending Group) to 9.885% (E-Loan).
And what if you're selling but your buyer can't get that jumbo loan he was counting on?
Make sure any purchase and sale agreement or comparable contract protects you from a buyer who has to back out.
Some sellers seek advance proof that potential buyers can get the necessary loan. If a buyer does fall through, look for another who can get a loan.
You can also finance a buyer yourself. But that can be tricky and risky.
For homebuyers seeking loans under $417,000, things have not changed as much. If you have a good credit history and can make an adequate down payment, you probably will have no problem getting a loan at an appealing interest rate.
Those smaller loans can be packaged into guaranteed securities that investors still want to buy. Investor demand for such securities has held down interest rates.
The 6.68% average for 30-year conforming loans is low by historic standards.
McBride says that 30-year and 15-year fixed-rate loans are the best choices now.
If you get an adjustable-rate loan, the initial rate won't be much lower than a fixed rate. And you run the risk of paying higher rates once the initial period expires.
Some homeowners don't stop with a mortgage loan. They also want a home equity line of credit.
Such loans are often adjustable-rate. They are secured by your home and can be used as you wish.
Home equity loans have tightened a bit, McBride says. You can probably get a loan equal to at least 80% of your equity in your home.
But buyers no longer can "piggyback" a first mortgage and a home equity loan to buy a house with little or no down payment.
And other types of loans haven't been affected by the mortgage mess. Auto loans, for example, have seen relatively few defaults.