What is a Jumbo Loan

A jumbo loan, considered a non-conforming loan, is a loan for an amount that exceeds the conventional loan limit. This limit is determined by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. The limit for a conventional loan used to be $ 417,000, or $ 625,000 in Alaska and Hawaii. However, in recent years a new category of conventional loans was created for the high-cost housing area. The new loans are called High Balance Conforming loans with up to $625,750 limit. Any loan amount above the High Balance Conforming limit is considered non-conforming or Jumbo.

How do the interest rates for jumbo loans compare to that of conventional loans?

The interest rate on a jumbo loan is usually higher than that of a conforming loan because the risks to the lender are higher. For example, if the buyer defaults, a luxury home is hard to sell quickly at its full value. Luxury homes are simply more vulnerable to market highs and lows. Because of this, jumbo loan interest rates usually run between .5% and 1.5% higher, and have jumped as high as 2% higher during times of housing turmoil or high investor anxiety. Other factors that determine the interest rate include property types and mortgage amounts.

Do jumbo loans require a down payment?

Yes. In fact, lenders often require a higher than usual down-payment on a jumbo loan. Due to mortgage crisis in 2008-2009 the minimum down payment on jumbo loans has been increaed to 20% and for larger Jumbo loans the down payment could be at high as 45%. Lender requirements for higher down payments are an attempt to alleviate the high risk lenders assume by carrying the loan.

Are jumbo loans only used for second homes or vacation homes?

No. In fact, homes in many big cities and their surrounding suburbs require a jumbo loan because of the steep rise in housing prices. To make these loans more affordable, some lenders offer a 40- or 50-year repayment option. Others give borrowers the option of making interest-only payments, allowing borrowers to purchase homes that would have been otherwise impossible to afford.

Do I have to maintain Private Mortgage Insurance on a jumbo loan?

Not always. There are ways to avoid paying Private Mortgage Insurance. PMI is only required for those who borrow more than 80% of the value of their home. As long as the Loan to Value (LTV) ratio is under 80%, PMI is optional. Many choose to split the mortgage into two parts, borrowing 80% with a jumbo loan and borrowing the rest with a higher interest second mortgage. This alleviates the need for PMI on the primary jumbo loan.