Jumbo loans, also referred to “mega mortgages”, are those home loans that are too large to be conventional loans.; that is, any loan that is larger than the limits specified by the Federal National Mortgage Foundation (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This pricing limit currently is set at $417,000 for a single family home.
Obtaining a Jumbo Loan
Jumbo loans are riskier for lenders than are conventional loans, so you should be prepared to pay an interest rate that is higher than normal to compensate for this risk. Usually, lenders will want you to offer a substantial down payment before extending a jumbo loan to you. You may be able to obtain a mega mortgage by putting down about 5% of the cost of the home, but remember that that 5% will be a good chunk of cash with such an expensive mortgage.
Jumbo loans may be either fixed mortgages, by which the interest rate for the life of the loan is predetermined, or adjustable rate mortgages (ARMS), by which one’s interest rate changes as market rates change. The terms and conditions attached to jumbo loans vary significantly, so work with a trusted mortgage lender to help you find your best match. If a particular broker does not offer what you are looking for, then rest assured that you can find it elsewhere.
As is the case with conventional loans, you will have to pay for private mortgage insurance (PMI) on a jumbo loan if you make a down payment of less than 20% of the home‘s value. PMI costs generally are about .5 to 1% of the loan amount, so this can be substantial when dealing with a mega mortgage. An alternate option would be to take out two separate mortgages instead, both of which are less than 80% of the total loan amount and therefore do not require PMI.
It probably seems clear by now that taking out a jumbo loan to live in an expensive market is pretty costly, so the great majority of jumbo loan borrowers have high incomes. It may be possible for middle class earners to secure jumbo loans, but remember that just because something is possible does not mean that it necessarily is a good idea. Most borrowers also need to have great credit histories. Consult a CPA on your options for securing your dream home.
The Future of Jumbo Loans
Today’s financial environment is relatively unstable, and this has led to a trend of mega mortgages becoming both more expensive and more difficult to secure. In general, interest rates on jumbo loans are higher today than they were even in recent history, and lenders additionally are tending to become more strict on the eligibility requirements for obtaining jumbo loans. These transitions should indicate to you that mega mortgages are relatively risky, and therefore are not for everyone.
While it may seem daunting to take out a jumbo mortgage (and even more daunting to repay it!), such loans work very well for some people to purchase their dream homes. Most easily attained by individuals with high incomes and strong credit histories, but sometimes available to other borrowers as well, jumbo loans give individuals a unique opportunity to purchase homes in expensive markets that they would not have been able to afford years ago.