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What Constitutes a Jumbo Loan?

Anyone thinking of buying or refinancing a home should have a clear understanding of the mortgage options available. Jumbo mortgages typically carry higher interest than conventional mortgages. If the house you want — or want to keep — requires a jumbo loan, you should be prepared for the financial consequences of agreeing to jumbo mortgage rates.

What Constitutes a Jumbo Loan?

As its name suggests, a jumbo loan for an expensive home carries a greater balance than a traditional mortgage. A traditional mortgage crosses into jumbo territory when it exceeds set periodically by the government-connected mortgage agencies, Fannie Mae and Freddie Mac. For 2010- 2011, the minimum jumbo mortgage amount was $417,000. In Miami, New York City and other areas with high median home prices, however, there is pressure to raise the jumbo minimum to $729,750. An increase in the jumbo loan minimum allows homebuyers and refinancers in those areas to qualify for lower-interest traditional mortgages.

Jumbo Loan Rates

Both Fannie Mae and Freddie Mac purchase millions of residential mortgages from smaller lenders for resale to professional investors. As large-balance loans, however, jumbo mortgages carry a greater risk of default than traditional house loans. This decreases the market for them as investments. Lenders of jumbo loans turn to raising their interest rates as a way to maintain their profitability.

Avoiding Jumbo Mortgage Rates

With some planning, you can purchase a high-priced home without taking on the burden of increased interest payments on a jumbo mortgage. One strategy is to take out a traditional, low-interest loan for an amount just below $417,000 and to finance the balance of the home’s price — at jumbo loan rates if necessary — with a second loan. If the home’s price is close to $417,000, you can look for a traditional rate mortgage to cover the balance as well. Most lenders, however, will require a down payment of at least 20 percent before they go along.

An alternative strategy is to investigate adjustable rate mortgages, or ARMs. They’re available for loans of up to $2 million. Their initial five- to seven-year interest rates rival those of traditional 30-year mortgages. The catches are that most ARM lenders require down payments of 20 to 35 percent, and that after the five- or seven-year fixed rate expires, the lender may raise the loan rate within federally regulated limits.