CNN Money's Les Christie reported how the massive credit squeeze in Wall Street is affecting home buyers in expensive neighborhoods:
Wells Fargo, one of the nation's biggest mortgage lenders, raised the interest rates on it 30-year, fixed-rate, non-conforming (AKA jumbo) loan to 8 percent last week, up from 6.875 percent. Other lenders followed suit and more are likely to join them.
The rate jump means the monthly bill for a $600,000 mortgage would hit $4,403, compared to $3,942 previously, an increase of $461.
Jumbos are loans of more than $417,000, the limit observed by Freddie Mac and Fannie Mae, the government sponsored enterprises (GSEs) that buy loans in the secondary markets. Freddie and Fannie don't buy loans above that cap.
Even borrowers with shakier credit scores than many jumbo loan applicants can qualify for a prime loan at about 6.75 percent, only 0.25 or 0.30 percent above what more qualified borrowers get, according to Keith Gumbinger, of HSH Associates, a mortgage information publisher.
But jumbo borrowers are paying a point and a half more than those who receive a conforming loan. That's way up from the traditional premium spread of about a half to three/quarters of a point.
The real-world question for me is: given that my 3-year expatriate contract will end in late 2008, if I choose not to extend it, can I still afford a house back in Seattle?
To put that into perspective, Seattle is one of the few metropolitan areas that still see some modest housing price appreciation lately. Since my kid has grown to school age and we are spoiled to some extent of big living spaces in Shanghai, if we were to shop for a house in the suburban Seattle, we might look at the price range of $800k to $1M. Can I still afford it?
By the end of 2008, we will likely have at least $1M, if not $1.1M, in liquid assets, so we can surely afford the house if we sell off everything in our portfolio. That's of course too dramatic, and realistically, we can pay about $300k as a downpayment without doing too much damage to our long-term financial plan.
This will leave about $600k to be funded by mortgage. At the CNN-cited rate of 8% from Wells Fargo for jumbo 30-year fixed mortgage, the monthly payment will be $4,400. Adding the property tax and insurance to the bill, the monthly PITI (principal, interest, tax and insurance) cost will be a bit over $5,000.
How will a lender see this? Likely by then, my tax return for year 2005, 2006 and 2007 will each report annual income in the $200s, so while the $60k annual housing cost is significant in absolute amount, it is still within the lending guidelines in percentage terms (usually 28% for mortgage payment and 33% for PITI payment).
Furthermore, sticking to a 30-year jumbo loan is unlikely the most economical approach. I can easily apply for a primary mortgage amount under $417,000 and add a home equity loan on top of that, and consequently take advantage of lower rates for the traditional (i.e. non-jumbo) loans. Alternatively, choosing an adjustable loan product like 5/1 ARM or 7/1 ARM for the primary mortgage can reduce my monthly payment significantly too.
So, the conclusion is we can surely afford a million dollar house financially. But we also recognize if we choose to live large back to the States, we will be paying much more than the $2,000 monthly rent for our 2,000-sqft apartment. Is it worthwhile to spend that much? That's a separate question.