Mortgage Terms Explained: Jumbo Home Mortgage

If you are in the market for a luxury home, you might have to be aware of something called a jumbo home mortgage.  Jumbo home mortgages apply when loan amounts exceed limits set by Fannie Mae and Freddie Mac.  Current limits for jumbo loans are $417,000 in the continuous United States and $625,500 for Alaska, Hawaii, Guam and the U.S. Virgin Islands.  Fannie Mae and Freddie Mac are companies that purchase the majority of residential mortgages in the United States.  They set these limits because those amounts are the maximum they will pay an individual lender for the loan.
 
Generally jumbo home mortgage rates are higher than standard loan rates.  This is because these loans are a higher risk for lenders.  If a consumer defaults on their loan, the lender may have a difficult time getting the full price for the residence quickly, therefore they charge a higher interest rate to make up for the risk.  Typically, jumbo mortgage loan rates are about .25% to .5% higher than standard loan rates, though this can fluctuate depending on the current economy.
 
Generally, jumbo home mortgage loans are fairly similar to standard loans as far as options.  Jumbo loans usually require a slightly higher down payment, usually about five percent more.  It is very rare to finance a jumbo loan with no money down because of the risk involved.  It is also common to find variable interest rates for jumbo loans.  This is because the interest rate increase over time can lead to a large dollar increase in the loan payment, resulting in more money for the bank.
 
One downside to jumbo loans is the expense of closing costs if a person chooses to refinance.  Often, people want to refinance their jumbo loans once they conform to the qualifications of a standard loan – that is, once the principal drops below the jumbo loan limits.  However, it may not be worth it if a small decrease in the interest rate is offset by high closing costs.  In depth analysis of the cost versus the benefits should be done before deciding to refinance a jumbo loan.
 
One option that has been popular, but can also be very risky is an 80/20 Jumbo Loan.  This is a creative way of getting around the down payment requirement.  Basically, a consumer is given two separate mortgages, one for eighty percent of the purchase price and the other for twenty percent.  The twenty percent is treated as the “down payment, “ so the purchaser can qualify for the loan and avoid PMI Insurance as well.  However, this can be risky because it means that the buyer has no equity in a very expensive home.  If home values decrease, the home owner could find themselves in a negative equity situation, and may end up selling the house for less than the loan amount.
 
It is important to be careful and weigh your options when looking into a jumbo loan.  Always make sure you are not getting more house than you can handle, because otherwise you may end up in an unpleasant situation.  If your dream house is above the limits though, a jumbo loan may be your only option.  Be sure to research carefully before financing, and you should be a happy, worry-free home owner!