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Jumbo Loans - What Defines Them?
Jumbo Loans are mortgage loans that exceed conforming loan limits. The conforming limit is set by the OFHEO otherwise called the Office of Federal Housing Enterprise Oversight.
The Two Institutions There are two institutions that have been Federally chartered to purchase underlying securities from mortgage originators. They are Fannie Mae and Freddie Mac. These funds are then re-invested in new mortgages to complete the cycle of fund flowing.
Now Fannie Mae and Freddie Mac are not a couple of really rich business people. On the contrary, they are Federal institutions that have been nicknamed to sound perhaps more friendly, who knows what the actual reason is, but it appears to be based on acronyms.
Jumbo mortgage loans carry a higher credit risk than any loans issued by Fannie and Freddie and in this respect, they carry a higher interest rate. Jumbo mortgage loans above the conforming limit of $417 000 fit into two categories:
Fixed rate Jumbo mortgage loans, where term is set at 15, 30 or even 40 years and the interest rate will not change for the life of the mortgage.
ARMs or adjustable rate mortgages. These are pretty self explanatory - Jumbo mortgage loans that carry a fixed interest rate for a certain period of time, and then a new rate is determined after the initial fixed period rate.
Pro’s and Cons of Jumbo Mortgage Loans
One of the biggest advantages of a Jumbo mortgage loan is that you don’t need to produce hard cash to purchase a large house. Another advantage is that interest payments are considered to be deductible from federal taxes, with the annual limit being $1,000,000. This could mean a very large savings.
The biggest disadvantage is the interest rate. Jumbo mortgage loans generally carry at least a 1.25% higher interest rate than normal loans, due to the greater risk they carry.
There is also a Super Jumbo Loan. Yes, these loans are much larger than life and carry even bigger interest repayments.
Note:
Jumbo mortgage loans are not really designed for the majority of the US and are specific to the Hamptons, Chicago, Boston, Los Angeles, Miami, Marin County and San Francisco. Jumbo mortgage loans are not really designed for an average household and in many instances it is wiser to take out a re-mortgage than apply for a Jumbo mortgage loan.
Important Tip:
It is advisable to read the fine print on the contract for a Jumbo mortgage loan very carefully as they are expensive financial instruments and could include additional fees or expensive closing costs.
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