What Is a Jumbo Mortgage?

Over the past few years, mortgages have become exotic and more complicated. Homeowners are finding it difficult to understand the wide variety of options they have when applying for a new mortgage. Most homeowners understand what a variable rate or a fixed rate mortgage is, but many are left wondering what a jumbo mortgage really is. Like the name states, a jumbo mortgage is a type of loan that is meant for a jumbo priced home. The amount this type of mortgage loan is associated with usually over shadows conventional loans or medium home prices.

In other words, a mortgage loan that is above the norm or has a value above the set limit will be considered a jumbo mortgage. Conventional home mortgage loans have a limited amount that can be financed to the borrower. For example, in 2010 the limit for conventional mortgage loans was $417,000. If a borrower is applying for a mortgage more than that value during the time that the limit was set, the mortgage is considered a jumbo mortgage. If a borrower is attempting to purchase a house that requires a mortgage loan to be an amount of $427,000 during the time that the limit was $417,000, the borrower will be required to make up the difference.

If the borrower cannot make up the difference, they will then be required to apply for a jumbo mortgage loan rather than a conventional loan. Jumbo mortgage loans are considered a higher risk than conventional mortgage loans due to the fact that a higher amount is being borrowed. The more money that is being borrowed for a new home purchase, the more of a risk the homeowner will be regardless of their credit score. In order for a lender to tackle the risks that jumbo mortgages are associated with, they will charge a higher interest rate or require a larger down payment.

Even though that a jumbo mortgage is usually associated with having a higher interest rate on the loan, the borrower has the option to lower the interest rates in two different ways. One of the ways that a borrower can lower the interest rates on a jumbo mortgage loan is by providing the lender a larger down payment than what is being requested. The more money that is put down on a jumbo mortgage, the less the interest rates will be on that loan.

Conventional loans work the same way when putting a larger down payment on the home. Another way that a borrower can lower interest rates with a jumbo mortgage loan is by purchasing points. Home buyers have the option to purchase points, but this can be costly to the home buyer when purchasing a home. However, the homeowner will save significantly if they remain current with their mortgage for a long extended period of time. Individuals who have the extra cash to provide a larger down payment, and are expecting to remain in the home for years to come are recommended purchasing points.

In the beginning, when jumbo loans were first used, they were considered a luxury tax on home buyers because of the amount being financed. However, today this isn’t the case anymore as many home values have sky rocketed till 2008. Today, home values continue to drop and homeowners who are currently in a jumbo mortgage are advised to refinance their mortgage if possible. Interest rates are pretty low, and homeowners paying a higher interest rate for a jumbo mortgage can save significantly when they refinance their mortgage before interest rates go back up. Jumbo loans are considered more difficult to qualify for since they are considered a riskier investment on the behalf of the lender.