Mega Loans: Mortgage Attributes of Wealthy Homeowners

Low Interest Rates and Rising Home Values Have Driven Refinance Activity since 2013

By Arthur Jobe Housing Affordability, Mortgage Finance

CoreLogic public records data show a cluster of active-mortgage loans that have origination amounts between $10 million and $20 million in recent years. We identified over 230 total active “super” jumbo mortgages and observed that 75 percent were originated since 2013. Refinances account for roughly 180 of the total count, and 74 percent of these were also originated since 2013. A more in-depth analysis of the refinance share highlights the likely motivations of these wealthy homeowners. 

Mega Loans Outstanding By Origination Year

The data shows that some borrowers were able to take advantage of lower interest rates through these refinances. Adjustable-rate mortgages (ARMs) have been particularly popular with loans of this magnitude due to their lower initial interest rates. While the expiration of the fixed-rate term on the preceding ARM may have provided the incentive to refinance, the data reveals that borrowers were able to capitalize on lower interest rates before the first adjustment. In fact, half of borrowers refinancing ARM loans before the first adjustment were able to obtain lower interest rates, decreasing their interest rate by an average of 70 basis points.1

Cash-Out Refinance Gain

ARMs remained the most popular option for those financing luxury homes. Roughly 76 percent of borrowers refinancing ARM loans opted to go with another ARM, and 31 percent of the fixed-rate borrowers switched to an ARM. The median initial interest rate for those ARMs was 3.25 percent, and most borrowers will see the adjustable period begin by the third quarter of 2024.

Distribution of Cash-Out Refinance Mega Loans

The share of cash-out refinances, particularly among fixed-rate borrowers, suggests the desire of homeowners to access cash by borrowing against home equity. Of the currently active loans originated in 2013 or later, 47 percent have been identified as cash-out refinances. By comparison, the two next largest mortgage purposes, consolidation and rate/term reduction loans, account for 21 percent and 16 percent, respectively. Often, the refinance mortgage origination amounts exceed the preceding loan origination amounts by several million dollars.1 The average increase in original principal balance for loans identified as cash-out refinance was $6.6 million. In 2018, the average refinance origination amount exceeded the prior mortgage amount by $8.3 million. Over half of fixed-rate borrowers received financing from three large banks, and public data shows that a 15-year term was the most popular with fixed-rate loans, followed closely by 30-year. The distribution of cash-out refinance mega loans outstanding by state shows that most properties were located in California. Further, the six states with the largest number of these loans account for 92 percent of all cash-out refinance mega loans. 

 [1] Where prior mortgage data were available.

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