As the name implies, jumbo mortgages are very large home loans.
There is talk of the current limits increasing, but right now – throughout the vast majority of the country -- a jumbo mortgage is any home loan above $417,000. In Hawaii, Alaska, Guam and the U.S. Virgin Islands, where real estate is very pricey, the amount jumps to $625,500.
Jumbo home loans and traditional mortgages are similar, but because jumbos are larger loans, they are more difficult to obtain. In some states, including parts of Connecticut, New Jersey, New York and California, many homeowners depend on jumbo mortgages. If you think you will need one, you should want to know the advantages and disadvantages, so here they are, starting with the pros.
The Pros Of Jumbo Mortgages
You need the money and the jumbo gives it to you. This arguably is the biggest advantage of this type of loan. Real estate can be very expensive and at least seven out of 10 home buyers need to borrow money in order to buy it. The jumbo means you don’t have to drain your savings to help pay for a large and/or expensive house.
With a jumbo mortgage, you don’t have to take out two or more loans. The jumbo simplifies home buying which can be a very complicated undertaking. In the past, a borrower might have had no choice but to find two lenders to buy a house. It can seem overwhelming when you have one loan to keep track of. Imagine having two. (To learn more about taking out multiple mortgage loans, see Piggyback Mortgage Loans: What You Need To Know.)
Home buyers have a variety of different jumbo loan programs from which to choose. Like traditional mortgages, jumbos allow borrowers to obtain a number of different fixed-rate or adjustable-rate mortgages. (For more information on the differences between fixed-rate and adjustable-rate mortgages, see Comparing Fixed-Rate And Adjustable-Rate Mortgage Loans.)
Interest rates for jumbo mortgages are dropping. Since 2009, when the federal stimulus package was approved, interest rates have dropped in an effort to spur home sales and economic growth. Interest rates on jumbos are near their lowest levels ever and can now be refinanced at historically low interest rates.
Jumbo loans are easier to apply for. More companies are offering this product and because of this competition for borrowers, lenders have made it easier to apply for jumbo mortgages. Make no mistake, jumbo mortgages are not easy to apply for, but they are easier to apply for now than in recent years.
Jumbo refinances can yield huge savings. Homeowners with traditional loans who refinance sometimes can save hundreds of dollars a month in a lower mortgage payment. Those with jumbos can refinance loan amounts between $417,000 and $650,000 and enjoy even bigger savings which can be used to pay down credit card debt, pay living expenses or build up savings and investment accounts.
Jumbo borrowers are getting attractive offers. Many banks and other financial institutions are making special offers to jumbo borrowers including reduced lender fees, private medical insurance and faster processing, among other things. Lending companies are doing this because of the promise of huge interest payments they’ll receive over the course of the loan. But keep in mind that only the most qualified borrowers – those with plenty of assets and high credit scores – are getting these offers.
So there clearly are advantages to obtaining jumbo loans, but there are also are very real risks. Here are some of them.
The Cons Of Jumbo Mortgages
Jumbos come with higher interest rates. It’s true that interest rates for jumbo mortgages are at historic lows, as they are for traditional mortgages, but regardless of how good your credit score is, you will pay a higher interest rate for a jumbo mortgage than you will for a traditional mortgage. That’s because if banks are willing to lend you more, they are taking on more risk and they are going to make you pay for that. For that reason, the interest rate for a jumbo mortgage is going to be about .5 percent higher than for a traditional mortgage.
Jumbos are more difficult to get. If higher interest rates are the biggest disadvantage, this one might be a close second. Borrowers need to show that they have a substantial income and lots of assets in order to afford to repay this type of loan. The loan payments for jumbo mortgages, of course, are much larger than with a traditional loan because so much more money is being lent. So borrowers must be able to prove to the underwriters that they can handle a jumbo mortgage. They also better have a very good credit history. The lending companies are going to pull a copy of their credit report and make sure that the credit score is high. The credit requirements for jumbo loans vary by institution but are more stringent than with a traditional mortgage.
The bottom line is that if you are considering a jumbo mortgage loan, you need to do your homework before getting one. Carefully weighing the pros and cons will ensure that you make a well informed decision.