Understanding Jumbo Loans

Finding the best jumbo loans can be very difficult, but is also very important given how much money you can save if you are able to find one with a good rate from a quality jumbo loans lender. Here are some tips that will help you to understand jumbo loans better, which in turn ca help you get a better rate on your loan.

What Are Jumbo Loans

First, in order to secure jumbo mortgage loans, you need to understand what is a jumbo loan. The current definition of a jumbo is a loan that is for less than $417,000 (that is the jumbo loans limit for 2010). However, note that this limit may actually be higher if you live in what is called a ‘high cost’ area. These limits are set each year by the two largest purchasers of mortgage loans – Freddie Mac and Fannie Mae.

What Do the Loan Limits Mean

Freddie Mac and Fannie Mae function as what I call an outlet for mortgage companies. They purchase the home loans that mortgage companies originate. This accomplishes two things: 1) it reduces risks for mortgage lenders who make loans and 2) it reduces the rate consumers pay for their mortgages (since the banks take on less risk they are willing to lend at lower rates). When loan values are higher than the limits, then those loans are classified as non conforming loans—as in they do not conform to the current limits established by Freddie and Fannie.

Mortgage Rates for Jumbo Loans and Super Jumbo Loans

If you need a jumbo loan or a super jumbo loan (which is a loan valued at $650,000 or more in most cases), then you can expect to pay a slightly higher interest rate than what you would pay with a conforming loan. The jumbo loans interest rate is generally .25 – .50 percent higher than standard loans. This is because your loan is generally more risky to the bank making the loan. Be sure to understand, however, the reason why your loan is more risky to the bank, and do your best to minimize that risk to the bank in order to get the best rate possible. Jumbo loans are more risky to banks for two reasons:

• Higher valued homes are generally harder to sell. Not as many people can afford jumbo homes, and as such can be more difficult to sell in case of default on the loan
• Jumbo mortgage loans do not have the American taxpayers subsidizing them. While most professionals will not tell you this little ‘secret’, I will argue that this is actually the main reason why loans for jumbo homes are more expensive. Because the bank cannot simply originate the mortgage and then sell it to Fannie or Freddie, the bank takes on more risk by lending in the jumbo loans market. Higher risk requires higher rates of return, which in turns means higher jumbo interest rates for consumers.

Remember, just because the loan you need is not a conforming loan does not mean you don’t have options. You just need to make sure that you can satisfy all the requirements for the loan.

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