Borrowers who want to buy a large or expensive home must answer the question, what is a jumbo loan? If your loan is classified as a jumbo loan, it can be more expensive than a traditional loan, in terms of both fees, interest rates and possible cost to refinance. The definition of jumbo loan varies from state-to-state, so when you begin your home buying process, you will need to answer the question of what is a jumbo loan by doing research within your local area.
A jumbo loan is a non-conventional loan over $417k. When a lender offers a mortgage loan, they usually do not keep the mortgage loan for the duration of the time it takes you to pay the loan back. Instead, they sell the loan on the secondary market to Fannie Mae or Freddie Mac.
These two major institutions are very powerful in the mortgage market, and most lenders want to be able to sell mortgage obligations to them in order to free up cash, or to obtain liquidity to do more business. Because a jumbo loan fails to qualify for Fannie Mae and Freddie Mac guidelines, borrowers must often pay extra to help lenders countenance the extra risk they encounter for financing it.
Jumbo loans were designed to help high-income individuals afford luxury homes or smaller homes in highly desirable areas. However, when home prices rise and houses become more expensive, more and more middle-income Americans have had to turn to jumbo loan financing to buy their dream homes.
As of 2009, in most areas of the country, loans above $417,000 are considered jumbo loans. However, if you live in certain regions in the country, you may be able to qualify for a conventional loan even if the cost of your mortgage exceeds this cap. In Guam, the US Virgin Islands, Alaska, and Hawaii, for example, borrowers may borrow up to 150 percent of the standard mortgage cap before their loan is considered a jumbo loan.
Additional Costs on a Jumbo Loan
Jumbo loans can be more difficult to qualify for, and unless your credit is very good and you'll likely have to put some additional money down to buy the home -- generally 10 percent minimum although when lending guidelines are tighter, you may be required to put down much more- up to 20 percent.
Typically, interest rates for a jumbo loan can be half a percentage point higher than rates for standard conventional loans, so you will also end up paying more in interest over the course of the loan. Many jumbo loan borrowers also end up incurring additional costs if they need to refinance their mortgage. Since the size of the loan is usually large, any bump in the interest rate can have major financial implications. An extra point on a mortgage of $500,000, for instance, translates to payments of an additional $5,000 annually to meet your mortgage obligations.
Selecting a Jumbo Loan
In some parts of the country, you may have no choice but to accept a jumbo loan as it is difficult to buy even a small starter home for under $417,000. However, if you are selecting a jumbo loan as an elective option to buy a large home, ensure that you consider the additional costs carefully. If you can afford a jumbo loan and want a large home, it is certainly a viable option; however, you want to understand exactly what is a jumbo loan before making that choice.