Home buyers seeking to finance a home around Palo Alto know firsthand the property values are a lot higher compared to most areas of the country. Recent data shows the median home value in Palo Alto is now close to $3,000,000. For homes in the jumbo loan category, most mortgage options require a down payment of at least 20 percent for properties selling for $3 million, with many banks even requiring 25 percent down payment.
NOTE: A Jumbo loan is a mortgage amount that exceeds the basic conforming loan limit. Borrowers can learn more about the latest conforming mortgage limits here.
Real estate isn’t the most “liquid” assets which translates into funds used for a down payment are locked into the property and can only be accessed with a home equity line of credit down the road. This leads borrowers to search for alternative financing options that will preserve their liquid assets instead of depleting them. In Palo Alto and surrounding areas in Santa Clara County, there are competitive loan programs that require only 10 percent or even 5 percent down, preserving liquid assets and leveraging these low rates we’re enjoying today. Regardless of where in California, there are competitive jumbo loan programs that don’t require a sizable down payment.
For example, there is an 80-10-10 loan that only asks for a 10 percent down payment. The program is structured with two loans, a first lien mortgage at 80 percent of the sales price of the home and a second, subordinate lien also at 10 percent of the sales price. For example, take a luxury home listed at $2,500,000. With the 80-10-10 option, the buyers make a down payment of $250,000. The first mortgage at 80 percent of $2.5mil would then be 2mil followed by a second lien at $250,000.
Another option is to make a down payment of 5 percent and financing the balance. Again, using a two loan method, the down payment using the same example would then be 5 percent of $1.75 million, or $87,500, a first at $1.4 million and second subordinate lien at $262,500. With this structure, the borrowers are only required to make a 5 percent down payment plus associated closing costs, preserving liquid assets even further.
NOTE: The most common reason to utilize a combo loan structure is to avoid monthly mortgage insurance or more commonly known as “PMI”
Finally, there are single loan programs that ask for either a 5 percent down payment or 10 percent. The general rule of thumb when comparing these various options means a down payment of 10 percent will result in a slightly lower interest rate compared to a jumbo loan with 5 percent, in a similar manner that conventional, conforming loan programs are priced. Interest rates are determined by risk, and greater down payments always lower the overall risk to mortgage companies. Keep in mind these programs aren’t restricted to Palo Alto and can also be used to finance any eligible primary owner-occupied home nationwide. Vacations homes are also permitted but will require minimum 10%-20% down payment depending on the loan amount.
Not all mortgage lenders and banks offer the same suite of mortgage loan options. This means if you talk to your bank and they require a 20 percent down payment, that doesn’t mean all lenders will require that amount. There are some very competitive 80-10-10 and 80-15-5 mortgage loan options as well as single loans with just a 5 or 10 percent down requirement. When it’s time to finance a higher end home in Palo Alto and surrounding areas, know you have more options than you might think. Reach out to us 7 days a week to learn more by calling the number above, or just submit the Request Contact Form above to quick service.
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