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Jumbo Mortgage Rates and Jumbo Loans
By Kirk Haverkamp
Updated and reviewed: Jul 7, 2013
Jumbo mortgages are used to purchase high-priced homes that require larger than normal loans. While they're convenient, they also charge slightly higher interest rates. Since the dollar amount that defines a jumbo mortgage is redefined each year, it's subject to change.
Bigger isn't always better, especially when it comes to home mortgages. The term "jumbo" mortgage applies to loans for exceptionally high dollar amounts. Each year, Fannie Mae (FNMA) and Freddie Mac (FHLMC), the government-affiliated agencies that market mortgages within the U.S., define the point at which a traditional mortgage ends, and a jumbo begins. These types of loans are increasingly popular-and necessary-for buyers trying to borrow large amounts to purchase their homes.
It may not seem fair that higher mortgages are saddled with higher interest rates, but the economic logic behind it makes sense. Both FHMA and FHLMC purchase the bulk of U.S. residential mortgages from lenders, and then resell them to professional investors. They're packaged together, and then traded on the market in a similar manner to the way stocks are traded on Wall Street. But jumbo loans aren't as easy as conventional loans to resell to investors, so the market for them is smaller. As a result, lenders typically charge more interest on these mortgages to help make them more profitable.
What's in a cap?
When the limits for jumbo loans were set last year, the ceiling on conventional loans was raised significantly. Now, "jumbo status" kicks in for any mortgage loan amount above $417,000. The change was considered necessary because housing prices in the U.S. had risen dramatically since the last adjustment. Nowadays, it's not unusual for homes to cost $400,000 or more, even if they're not considered luxurious. Consumers and lenders alike welcomed the new limit. Some special exceptions for places like Hawaii-where the cost of living is higher than usual- allow for even higher caps.
Strategies for avoiding jumbo rates
Because jumbo loans carry higher rates-usually a quarter of a percent higher than conventional loans-consumers who are borrowing an amount that's close to the limit will often try to figure out ways to avoid triggering jumbo status. 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 $450,000 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 for $35,000.
The interest rate on the smaller loan will likely be higher, but you can pay it off in a relatively short period of time. Avoiding the jumbo rate on the significantly larger loan more than pays for any added costs on the second loan.
Over the lifetime of a loan, the savings gained by qualifying for a slightly reduced rate can be huge, adding up to tens of thousands of dollars. Now that's a jumbo savings!
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.