What is a Jumbo Loan?

When you start to explore your mortgage options, you may hear the term “jumbo loan.”

If you are looking at properties that are more expensive for the area, then this is the loan for you. For instance, if you are considering homes requiring a mortgage that exceeds 417,000, it’s a good idea to find out more about jumbo loans and discuss them with your lender.

What makes a loan jumbo?

A loan is considered a jumbo if it exceeds what is known as the conforming loan limit. The current conforming loan limit for a single-family home is $417,000 for all states except for Hawaii and Alaska, where it is $625,500.

However, if you live in a high-priced market, there are conforming high balance limits available for certain loan programs. These loans have higher interest rates and stricter underwriting requirements than standard conforming loans, but are generally priced lower than jumbo loans. Additionally, limits may be different for multi-unit properties.

How are jumbo loans different?

Qualifying for a jumbo loan usually requires lower debt-to-income ratios, higher credit scores, larger down payments, and higher reserves than conforming loans. Jumbo loans can also have higher interest rates compared to a conforming loan. Differences vary by lender.

What are your options?

A jumbo loan is one potential way to buy a high-priced home, but other options include:

• Increasing your down payment. This is the simplest option. If you can put more cash toward the down payment, you will borrow less. This could be especially helpful to you if the mortgage you are considering is only slightly above the conforming loan limit.
• Obtaining two mortgages. This is also called a combination loan. This option is more complex. It entails taking out a second, smaller mortgage at the same time as the first. By doing this, your first, larger mortgage would conform to the loan limit, and you may avoid some of the increased requirements and higher rates of a jumbo. However, the interest rate on a second mortgage is typically higher than on a first mortgage, so you’ll want to calculate the costs and potential savings carefully. In addition, if you took out two mortgages, you would be responsible for paying both of them each month. So you would need to be sure that you could manage the combined payment. Not everyone will be eligible or qualify for this loan option.

If you are considering a jumbo loan, discuss your options with your lender. Whatever you choose, you should be confident that you will be comfortable with affording the loans you obtain. 

Which Mortgage is Right for You?

The mortgage world can be very confusing. Every mortgage has variables that determine how much a borrower ends up paying.

Before you begin your purchase, take a look at the different types of loans available today and which one are you most likely to benefit from.

30-year Fixed-Rate Mortgage

This mortgage combines a stable, fixed interest rate with a long loan term that helps create manageable payments for millions of people. During the years leading up to the current mortgage crisis, many homebuyers strayed from this in search of loans with lower interest costs. Today, many borrowers are returning to the 30-year fixed-rate way.

This is best for borrowers who plan to remain in their homes for a long time and/or who want the security of knowing their monthly payment will never change.

30-year Jumbo Mortgage

Jumbo mortgage loans are 30-year fixed-rate loans too big to be bought and repackaged by mortgage giants Freddie Mac and Fannie Mae for resale to investors. Banks that issue jumbo mortgages have to hold onto the debt themselves.

As a result, jumbo borrowers can expect not only a higher interest rate on their loan, but also have more difficulty finding a lender.

Jumbo loans are best for buyers who want large, expensive or midrange homes in areas of where housing is more expensive.

One-year ARM

ARM stands for adjustable-rate mortgage. Unlike fixed-rate mortgages, these loans don’t have a rate guaranteed to remain stable for the duration of the loan. The introductory rates on these loans, which last only for the first year, often are significantly lower than rates on fixed-rate loans. The term for these types of loans are usually 30 years.

After one year, the interest rate and the monthly payment, adjusts periodically based on a mortgage index such as the Libor (London Interbank Offered Rate) or COFI (11th District Cost of Funds Index). In a falling-rate environment, that’s a good thing, as it results in lower payments. However, if rates increase, you’ll have higher payments.

ARM’s are good for buyers who don’t plan to stay in their homes very long and who are looking for lower borrowing costs.

5/1 ARM

The 5/1 ARM is an adjustable-rate mortgage that has a fixed rate for five years. After that, the rate adjusts periodically. Buyers benefit from lower borrowing costs when interest rates fall, but get stuck with higher payments when interests rise.

5/1 ARM are for buyers who intend to sell within five years and are looking to cut down on their mortgage costs.