A mortgage loan is a very important product because it gives the majority of Americans access to home ownership. It would be quite difficult for most people to purchase a home without the help of a mortgage loan. Mortgages come in various shapes and sizes and are designed to accommodate the needs of most people, whether they are first time home buyers or real estate investors. Mortgages have several characteristics that differ based on the borrower’s needs and qualifications (Read: Are You Applying for a Mortgage? These Things Might Ruin Your Chances of Approval!) . One of these characteristics is the size of the mortgage loan.
Regular mortgage loans usually require a 10 to 20 percent down payment, certain debt-to-income ratios, and a good credit score. Depending on these factors, your interest rate might be higher or lower, and you may be able to borrow more or less. In some areas you won’t be able to buy a home valued at over $400,000 with a regular mortgage, while in others you can buy homes that cost over $700,000 by using a regular mortgage. That amount is more than enough for most people and families, but not enough for others. If you have the means to keep a large mortgage, you may want to borrow more than the maximum limit of regular mortgage. In that case, you should take a look at jumbo mortgages.
What is a Jumbo Mortgage Loans
A jumbo mortgage loan is nothing more than a regular mortgage loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. The limit varies from one area to another, so you can expect to have to take out a jumbo loan for a home that is worth a lot less than other homes in better areas. Generally, the maximum limit is significantly higher in more expensive housing markets.
Lenders take a larger risk when giving out jumbo loans, so they will be more careful when giving out this type of mortgage loan. A default on a jumbo loan would hurt the lender financially much harder than a regular loan. Jumbo loans typically require a 20 percent down payment, which means that the borrowers have a larger investment in their homes, making them less of a default risk. Lenders require a very high credit score, which means that the borrower has a good history of repaying his or her debt, giving the lender more peace of mind (Read: How to Get a Great First Mortgage).
The Advantages and Disadvantages of Jumbo Mortgage Loans
Jumbo mortgages are a perfect choice for those who need larger mortgages, but they also have other advantages. Here are the most important advantages of a jumbo mortgage loan:
- Just One Loan. By taking out a jumbo loan you won’t have to take out two or more different loans. Jumbo loans provide the money that you need to make a home purchase, and allow you to avoid having to take out multiple loans, which can be pretty complicated (Read: Taking Out a Third Mortgage – Is That Possible?).
- Low Rates. Interest rates on jumbo loans are low. Interest rates on jumbo loans have started to decrease in 2009 when the federal stimulus package was introduced.
- Big Savings. Refinancing a jumbo loan can bring large savings. Refinancing any mortgage loan will usually bring savings, so refinancing a loan that is larger than usual can bring even greater savings.
Jumbo mortgage loans bring great advantages, but also have a few downsides. Here’s what you need to keep in mind when taking out a jumbo loan:
- Higher Rates in Comparison. The larger the risk the lender is taking, the larger the interest rate will be. While interest rates on jumbo loans are lower than ever, they are still high when compared to interest rates on conventional loans (Read: Jumbo Loan Rates vs. Conventional Home Loan Interest Rates).
- Less Approval. Qualifying for a jumbo mortgage loan is more difficult. You must have a great credit score and a large income to qualify for a jumbo mortgage loan. While you can get away with having a less than perfect credit score when applying for a regular mortgage loan, jumbo loans require a prefect or near perfect credit score (Read: Boost Your Credit Quickly With These Simple Tips).
Jumbo mortgage loans, like any other loan, are designed for borrowers with certain needs, and will not be a great choice for everyone. Knowing what type of mortgage you need is very helpful when buying a home. It can make the difference between a great purchase and one that will give you nothing but trouble along the way.