Jumbo Mortgages

The term “Jumbo Mortgage” describes a mortgage with a loan amount higher than the standard limits. The “standard” is determined by Fannie Mae and Freddie Mac : the two largest secondary market lenders.  Jumbo mortgages thus come into play when Fannie Mae and Freddie Mac limits do not cover the entire amount of the loan. As of 2006, the current limit was $417,000, or $625,500 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. However, much of this has changed in light of recent legislation and temporary 'stimulus' measures so the limit is subject to change under certain circumstances.

When one requires a loan above that limit, insurance companies and banks arrive to fill the gap by providing mortgage amounts near the $1-$2 million range. Interest rates for such higher loan amounts are generally higher than those for normal, standard mortgages.

Jumbo mortgage loans are indeed a higher risk for lenders, but not just because of the higher interest rates that come along with them. It is much more difficult to quickly sell a luxurious residence or property at full price if such a mortgage loan defaults. Jumbo home prices can also be more ‘open to debate’ than standard properties and many lenders even require two appraisals for such a loan.

Despite all of this though, Jumbo mortgage loan options are basically similar to traditional loan programs. They do require a slightly higher down payment, but usually only around an additional 5% for similar program types. Also, because the loans are large, jumbo lenders frequently offer variable loan programs to the jumbo client. The risk of an interest rate increase can result in a large dollar amount increase.

It can also be more expensive to refinance a jumbo loan because of the closing costs associated with this type of mortgage. Some lenders will even offer or suggest the service of an extension and consolidation agreement, which prevents a jumbo refinancer from having to pay for mortgage tax again on the same principal balance.