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Know your loan options: What is a jumbo mortgage?

Feb. 7, 2020 • 6 min read

What we'll cover

  • The definition of a jumbo mortgage

  • Difference between jumbo and conventional mortgages

  • When you need a jumbo loan

Have a growing family? Ready to move into your dream digs? Sounds like upgrading your home might be on your agenda. If you're looking at an upscale property or simply one in an area of the country where the cost of living is high, chances are you might be considering a jumbo mortgage.

A jumbo loan isn’t your typical home loan, in terms of how much you can borrow or what's required to qualify. With a jumbo mortgage, you’re borrowing more money for a home than you typically would with a conventional home loan. It could be a good fit if you’re looking to upgrade your digs or you live in an expensive area of the U.S., and you know what to expect.

Here’s what you need to know about how these loans work and why you might consider one for your home purchase.

What is a jumbo mortgage?

The simple answer is that a jumbo loan is a home loan that exceeds $510,400 in most states. In other areas, such as Hawaii and Alaska, the limit is $765,600 in 2020 to account for the above-average home prices in those markets.

Jumbo Mortgage vs. Conventional Mortgage

A jumbo loan isn’t the only home-buying option — you may also be considering a conventional mortgage and thinking about mortgage rates. The question is, how do you decide which mortgage is right for you ?

Here’s a quick way to narrow it down:

  • If you need to borrow $510,400 or less, then consider a conventional mortgage.

  • If you need to borrow more than $510,400, then you might need a jumbo loan.

  • Take note: If you want a lower interest rate in the early years of the loan, an adjustable rate mortgage could be the best fit.

When do you get a jumbo loan?

Jumbo loans are issued when the amount you’re borrowing exceeds the borrowing limits set for conforming loans.

You might be asking yourself: What does that mean?

To understand jumbo mortgages and how they work, it helps to take a step back and have a little background on conforming loans. A conforming loan means a home mortgage that conforms or follows certain borrowing guidelines established by Fannie Mae or Freddie Mac. In other words, it's what you might think of when you think of a conventional or traditional home loan.

How do you qualify for a jumbo mortgage?

Jumbo loans are by nature a little riskier than conventional loans for banks. When you're borrowing more than $500,000, there's more at stake for the bank in terms of making sure that you're able to pay that money back. As a result, not everyone will qualify for a jumbo home loan.

If you’re interested in getting a jumbo loan, the process is more or less the same as it is for a conventional loan. Every bank has different requirements when it comes to jumbo mortgage eligibility. But generally, to be approved by a jumbo lender, you'll need to have:

  • A minimum credit score of at least 700

  • Stable income and a low debt-to-income ratio

  • Substantial assets in savings or investments

  • A sizable down payment (For example, we require at least 20% down for our jumbo mortgages .)

You shouldn’t be intimidated by a lender’s list of qualifications. If you're considering a jumbo mortgage, odds are that you're in a position to afford it, if you have a solid income, have your debt under control, and are focused on saving and investing to build wealth for the long term.

How much money do I need to get a jumbo loan?

You will need decent cash reserves to afford a jumbo mortgage. In addition to your down payment, there are also your closing costs to consider, which typically will account for 2% to 5% of the home's purchase price. As you map out your home-buying budget, you'll want to factor in those expenses.

So, say you need a $1 million jumbo mortgage, and you plan to put 20% down. You'll need $100,000 for the down payment. You'd also need another $20,000 to $50,000 to cover your closing costs.

The cost of a jumbo loan (example): If you need $1 million jumbo loan and plan to put down 10% ($100,000), then you can expect to pay a total of $120,000-$150,000 (down payment + closing costs of 2-5%)

Remember, the more you put down, the less you'll have to pay back and the more money you could save in interest over the life of the loan. A bigger down payment can also help you sidestep paying private mortgage insurance, which can increase your monthly payment.

It's helpful to run the numbers through a mortgage calculator , so you have an idea of what your monthly payments will work out to and what you'll pay in interest. This can also help you estimate what you'll need to pay at closing.

Is there a limit to the size of a jumbo loan?

The short answer is, it depends. Every bank and lender is different when it comes to how much they're willing to let you borrow for a jumbo loan.

How do jumbo loan interest rates compare with conventional loan rates?

Any time you're getting a home loan, you want to get the best rate possible. So you’re probably wondering whether jumbo mortgage rates are higher or lower compared to conventional loans.

Jumbo mortgage rates really aren't that different from conforming loan rates — both follow the 10-year Treasury as a benchmark for setting rates. That means you can take advantage of the current historically low rate environment on a jumbo mortgage just like you can with any other home loan.

It may even be possible to land a rate that's lower than a conventional mortgage’s, depending on the lender and how qualified you are for a loan.

Both fixed-rate and adjustable rate jumbo mortgages are available, and it's important to decide upfront which one you'd prefer. A fixed-rate can offer some certainty about how much you'll pay in interest total and your monthly payment. Adjustable rates, on the other hand, could save you money if rates stay low. But the total cost to you is unclear because rates could rise, causing your payments to increase.

Why should you consider a jumbo loan?

Simply put, the best reason to consider a jumbo mortgage is that it can help you buy a more expensive home when other mortgage loans fall short.

If you stick with a conforming loan, you might have to resort to piggy-backing multiple mortgages to make a home purchase. Or you may have to dig deeper into your liquid savings or investments to make up the difference between the purchase price and the loan limit.

Jumbo mortgages eliminate those obstacles, giving you more flexibility in home-buying. The amount of cash you'll need to bring to the closing table might be more than what you'd typically need on a traditional loan, but it may not be a stretch if you've saved faithfully.

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