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Jumbo Mortgages 101

June 12, 2015
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When you hear the phrase “jumbo mortgage,” you might think it means a home loan that’s really, really large. And you’re right — to a point. But it’s a little more complicated than that.

Let’s back up.

Who’s loaning you the money, really?

When you buy a home, you’re generally borrowing money from a financial institution — but the lender doesn’t necessarily hang onto that loan after you close the deal. In many cases, it will sell your loan to government-sponsored corporations Fannie Mae or Freddie Mac. Then, once your mortgage is off its books, the financial institution can turn around and lend the money to a different borrower. Being able to sell your loan quickly reduces the lender’s risk. In addition, interest rates on this type of loan are usually fairly similar from lender to lender, and the loans are available from a wide variety of financial institutions.

But Fannie and Freddie have guidelines for how large these mortgages can get: $417,000 as of 2015 in most of the U.S., and up to $625,500 if the home is in a specific high-cost real estate market like Nantucket Island, Manhattan or San Francisco. Loans for a dollar figure higher than that ceiling, often called jumbo mortgages, are “nonconforming” and can’t be sold as easily. As a result, the lender’s risk is greater, so it sometimes charges a higher interest rate than it would for a conforming loan. Some lenders don’t offer nonconforming loans at all, limiting borrowers’ choices for which bank or credit union they’d like to use.

Do you need a jumbo loan?

Jumbo loans refer to the size of the mortgage, not the overall purchase price of the house. Even if you’re buying a house worth more than the conforming loan limits for your area, you won’t need a jumbo loan unless the amount you’re actually borrowing is above that dollar figure.

If you do need a jumbo mortgage, it’s not necessarily a problem. As long as there’s a market for jumbo loans, there will probably be lenders willing to provide them. Many lenders are happy to extend a mortgage to a qualified buyer and hang on to the loan, collecting payments from the homeowner and recouping the money over time.

But because a loan that’s harder to sell is riskier for the lender, some financial institutions reduce their risk in other ways. They may charge a higher interest rate, or they may require a larger down payment.

What’s next?

The whole point of a mortgage is that you’re borrowing money temporarily. Both the buyer and the lender expect that the loan will be paid off over time, or will be refinanced. If you need to start out with a jumbo loan and you received less-than-ideal terms as a result, pay diligently for a while and then check to see whether your loan balance has dropped below the latest limits for conforming loans. If it has, and if current interest rates are low enough to make it worth it, you may be able to refinance into a conforming loan and say goodbye to jumbo status.