Budgeting for Your Jumbo Mortgage

Planning ahead has its advantages. It can keep you out of trouble with the IRS, protect you from financial disaster, and help you retire in style. More immediately, thoughtful planning can bolster your confidence about purchasing that expensive home you’ve been eyeing.

Funding a jumbo mortgage -- loans that are more than $417,000 to $729,750, depending on your area -- is a big commitment, particularly in this economy. You’re taking on huge debt, with no guarantee that the value of the underlying property will hold, so conscientious budgeting for your jumbo mortgage is crucial.

No leeway on down payment    

The first number to plan for is your down payment. These days, you won’t find a jumbo mortgage loan that doesn’t require at least 20 percent down.

You can determine the amount of house you can afford in one of two ways. The most logical approach is to review your personal assets, calculate what size down payment you can comfortably pay, and work backwards to determine the amount of house that’s in your budget.  If, for example, you have $250,000 in cash, you can use $200,000 as a down payment, and reserve the balance for closing costs and emergency fund savings. Knowing that jumbo mortgage lenders will ask for a 20 to 30 percent down payment, this implies a purchase in the range of $667,000 to $1 million.

Alternatively, you could calculate the required down payment from your predetermined purchase price. For example, a $750,000 home requires a $150,000 to $225,000 down payment.

Rates: Fixed or adjustable?

Next, use a mortgage calculator to determine monthly payment scenarios. In the latter half of 2010, zero-point, 30-year, fixed-rate jumbos are being priced in the mid-5 percent range.

Of course, that rate is only available if you can get it. You may have an easier time obtaining approval for a 15-year, fixed-rate jumbo loan, which are about 50 basis points (or one-half of 1 percent) lower than the 30-year rates.

Jumbo adjustable-rate mortgage (ARM) rates are even more favorable, dipping down into the 3-percent range. The drawback is that you would be subject to annual rate increases once the initial fixed-rate period expires, after about five to seven years. Most homeowners would either refinance or sell the property during that five- to seven-year window to avoid potential rate increases.

Payment amount and income

The last step is to budget for your monthly payment. A reliable mortgage calculator can run various scenarios for you. Lenders won’t agree to a mortgage payment that’s greater than 38 percent of your income before taxes. And they only care about income you can document; otherwise, in their eyes, the money doesn’t exist.

To determine the maximum amount you can afford to pay on a monthly basis, multiply your gross monthly income by .38. The resulting number should be higher than or equal to the monthly payment amount that appears on your mortgage calculator. If it is, you have identified an appropriate purchase budget. If it isn't, there's more planning to be done, because being saddled with a jumbo payment you can't afford may be more painful than being in trouble with the IRS.