Jumbo Loans
What is a jumbo loan?
A jumbo loan has a loan amount larger than the national average home price ($417,000 in 2008 in all states except Alaska and Hawaii). They are sometimes called non-conforming loans because they don’t meet the criteria set out by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are two agencies established by the federal government to provide stability and affordability to the mortgage market. They do this by buying conforming loans from lenders.
Bigger isn’t necessarily better.
Jumbo loans tend to have higher interest rates because they are riskier to the lender. How much higher the interest rates are depends on market conditions, but usually range between 0.25 and 0.5 percent higher. However, because of the recent turmoil in the mortgage market, the difference between a conforming loan and a jumbo loan has been over 1 percent.
There are a couple of ways to avoid the jumbo price hike: you could make a larger down payment to bring the loan amount below the conforming limit; or, you may be able to split your loan into two mortgages. This option is known as a combination loan. With this option, you will likely pay a higher interest rate on the second mortgage, but you may come out ahead in the long run. Have your lender crunch the numbers for you.
Jumbo loans come in as many varieties as conventional loans: fixed- and adjustable-rate, a variety terms and options. Typically, however, jumbo loans do not come with a no-money down option and may have stricter qualifying guidelines.
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