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What is a Jumbo Mortgage?

When purchasing a home, you may find that your home is priced higher than the limits of conventional loans. If the amount of your mortgage exceeds the limit, instead of a conventional mortgage, you may be required to obtain a jumbo mortgage. What is a jumbo mortgage?

The limit of conventional loans is set by two United States government-sponsored agencies, Fannie Mae (FNMA) and Freddie Mac (FHLMC). These agencies purchase most of the residential mortgages from lenders and banks, which they then bundle and sell to investors. In order to reduce risk and maximize liquidity, they will not buy loans bigger than the set limit. This limit can be changed each year and varies in different parts of the United States.

What is a jumbo mortgage?

A jumbo mortgage is a loan that is used to purchase homes that are priced higher than the limits of conventional loans. Some jumbo loans may carry terms longer than 30 years in order to be more affordable, and may extend to 40 or 50 years. In this economy, the delinquency rate on these mortgages is rising. If a loan defaults, the lender may not be able to sell the building for the value of the loan, since the price of luxury homes prices tend to fluctuate more than prices for necessities. Since the larger loan amounts are more difficult to package and resell, and constitutes a larger risk to the lender, these loans will generally carry higher interest rates. The qualification requirements for these loans may be more strict, often requiring a larger down payment, and two appraisals.

In order to avoid the higher rates, if you are borrowing an amount that is close to the jumbo loans limit, you may be able to find a way to avoid a jumbo loan, if your mortgage company allows it. In this case, you can take out two loans at the same time – the first mortgage for an amount slightly less than the jumbo limit, plus a small second mortgage for the remainder.

The interest rate on the smaller loan will probably be higher, but it is for a smaller amount, and you can pay it off in a shorter period of time. The amount of money you save on the jumbo loan rate for the larger amount will help offset any added costs on the second loan, and possibly net you a savings.