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The Good School-Expensive Home Dilemma

A good local school can be one of the biggest drivers of home prices in a community.

Peter and Megan Dale of San Francisco say their two-bedroom condominium in Cole Valley, just south of the Haight-Ashbury District, is starting to feel cramped; their two school-aged children share a single room. But they have no plans to leave the condo, which they bought for $990,000 in 2007. The reason: The nearby public school is rated a “9” out of 10 by, an Oakland, Calif.-based education-advice website.

A good local school can be one of the biggest drivers of home prices in a community. And parents hoping to get their children the best education possible are often willing to stretch their finances for a pricey home in a good school district, sometimes taking out ambitious loans. When the Dales bought their condo, they took out an interest-only jumbo mortgage that allowed them to put down just 3% instead of the usual 20%. When the market fell, they briefly found themselves underwater on the home. And they face hefty payments ahead when their loan resets to a principal and interest payment. Mr. Dale, a 42-year-old software designer, says the headaches are worth it for the great school and a short commute to his Montgomery Street office: “Some things are just more important than money,” he said.

In the past year, relatively low rates for jumbo loans have made buying in expensive school districts a little easier for some borrowers. Even so, some jumbo borrowers say they have trouble competing in markets where cash-only deals are commonplace. Anna Sikha, who lives in San Francisco with her husband, needed jumbo financing when they shopped for a home in the same neighborhood as the Dales in the hope of getting their 3-year-old son into same school. They lost out on several homes to all-cash buyers. “We were constantly getting outbid. It was so depressing that we thought about renting,” Mrs. Sikha, who works for a biotechnology company, said. Ultimately, they bought a condo in the neighborhood for $1.25 million, with the help of a jumbo loan.

Mark Livingstone, president of Cornerstone First Financial, a mortgage broker in Washington, D.C’s Georgetown neighborhood says he often needs to write aggressive preapproval letters for his jumbo-loan clients that waive appraisals and financing contingencies in neighborhoods such as Bethesda, Md., that have highly rated public schools. “Families are willing to pay more for a home to get into a well-rated public school. They see themselves saving $10,000 to $20,000 year in private-school tuition,” Mr. Livingstone said.

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