Jumbo Mortgages: The Pros and Cons

The term "jumbo" mortgage applies to loans for exceptionally high dollar amounts. Each year, Fannie Mae and Freddie Mac, the government-affiliated agencies that market mortgages within the U.S., define the point at which a traditional mortgage ends, and a jumbo begins. With the medium price of a home in California soaring to $550,000 in 2005, these types of loans are increasingly popular-and necessary-for buyers trying to borrow large amounts for mortgages.

Loans for expensive homes

Last year, the ceiling for conventional loans topped out at $359,650. If you wanted to borrow more than that, you needed to take advantage of a jumbo loan. On the plus side, jumbo mortgages allow you to borrow large amounts of money without having to go to non-traditional lenders. Otherwise, you might have to seek private lenders who specialize in so-called "hard money" loans, and offer loans at extremely high rates. The trade-off is that you'll generally pay slightly higher interest rates for these super-sized loans. Anyone interested in a jumbo mortgage should stay updated on current guidelines.

Special opportunities for acting now

Homebuyers who are shopping for upscale property in 2006 should consider taking advantage of a special opportunity. Since the recent bull market in real estate contributed to inflated prices, the limit for conventional loans was raised this year by a staggering 16 percent. It was the largest single-year rise in history. As a result, in 2006, jumbo loans began at $417,000, more than $56,000 higher than they were in 2005. If you live in Alaska and Hawaii, the limit is even higher.

Some people who already have a jumbo mortgage for less than $417,000 are planning to refinance this year. They can convert to a conventional loan, and qualify for somewhat lower interest rates. But rates have climbed considerably within the past year, so this particular strategy-coupled with the cost of refinancing-may not be prudent.

Jumbo loan alternatives

If the amount you need to borrow is close to the traditional loan limit, there are available options that won't trip the wire on the jumbo loan guidelines. Some mortgage companies will let you take out two loans at the same time-one as a first mortgage for the bulk of the money, plus a small second mortgage that will work in tandem with the first. For example, for a $419,000 purchase, you might be able to use a conventional loan to borrow $415,000, and then come up with the rest through a smaller second mortgage.