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How to use jumbo mortgage financing to buy a high-priced home

Craig BerryThe Mortgage Reports Contributor

In this article:

When you finance expensive property, you need a jumbo mortgage. You’ll have to play by different rules, because mortgages for high-priced homes are not standardized. “Conforming loans” — those that conform to Fannie Mae or Freddie Mac loan limits —  enjoy similar rules nationwide. But many banks and lenders create proprietary programs for bigger loans.

  • Jumbo loans typically carry higher interest rates than conforming (conventional) mortgages. Adjustable rates, rather than fixed rates, are popular among high-loan-amount borrowers
  • Jumbo rates can vary more widely from one lender to the next compared to standard mortgage rates
  • Consider a “piggyback” mortgage to keep your first mortgage below conforming loan limits. This combination of a conforming first mortgage and a small second mortgage may save you money.

What is a jumbo mortgage?

When you finance expensive property, you need a jumbo mortgage.

While a loan that meets guidelines established by Fannie Mae or Freddie Mac (a so-called “conforming” home loan) can be easily sold to investors, a mortgage that exceeds $453,100 is considered “non-conforming.”

Also known as a jumbo mortgage, this home loan plays by its own rules.

Verify your new rate (Sep 24th, 2018)

Jumbo mortgage financing: it’s back

During the mortgage crisis a few years ago, jumbo loans all but went away. The ones that remained came with guidelines that were nearly impossible for homeowners to meet.

High down payments, high interest rates, and high credit standards made jumbo loans almost obsolete.

But as the real estate market steadily recovered, jumbo loans re-entered the lending landscape.

In fact, home buyers in the market for a larger loan may be pleasantly surprised to know that jumbo mortgage rates are nearly as low as conforming rates.

Conforming rates vs jumbo mortgage rates

Jumbo loans typically carry higher interest rates than conforming mortgages.

Jumbo mortgage rates are back, however, and they are looking good!

Not too long ago, conforming and jumbo rates ranged between half a point to two full points.

These days, however, the spread between jumbo rates and conforming rates is minimal — about 1/10th of a percent, according to one national survey. 

Look at jumbo ARMs

ARM rates can be over one percent lower than fixed-rate jumbo loans. For borrowers with larger loans, ARMs are popular alternatives.

Bigger loan balances mean that a 1% difference in rate could mean $500-per-month savings or more.

In addition, jumbo ARM rates can sometimes be lower than their conforming counterparts.

Many jumbo ARMs are not sold to investors, but are instead held by lenders on their own books. These “portfolio” mortgages can be made according to whatever guidelines and pricing the lenders establish.

The market is much less homogeneous, and the smart shopper can often find a bargain with a lender trying to expand its market share or build up its pipeline.

Jumbo ARMs come with introductory periods in which their rates are fixed. You can find loans fixed for three, five, seven, or ten years.

If you don’t keep your mortgage for more than the introductory period, you’ll never even have to deal with rate adjustments.

Verify your new rate (Sep 24th, 2018)

Compare and shop jumbo mortgage rates

Unlike conforming mortgage rates, which typically differ by .25 to .5 percent between competitors, jumbo mortgage rates can vary largely from one lender to the next.

Jumbo lenders can serve different markets — alternative documentation, non-prime, unorthodox properties, or borrowers with big down payments and perfect credit — and that affects the rates charged.

This means that when conforming mortgage rates are higher, jumbo rates don’t necessarily follow that the same path.

It definitely pays to shop and compare.

Unlike smaller mortgage loans, a half percent difference in the interest rate on a $700,000 loan amount can add up over time.

  • $700,000 at 4.375% = $3,495
  • $700,000 at 4.875% = $3,704

The difference between these two scenarios adds up quickly. Over five years, $209 per month saves over $12,500.

When conforming loan rates are lower

When conforming rates are significantly lower than jumbo rates, consider a piggyback mortgage. This combination of a conforming first mortgage and a small second mortgage may save you money.

You take a second mortgage to cover the portion of the loan that is over your area’s conforming limit.

For example, you need a $600,000 loan. Your area’s conforming limit is $550,000. You could take out a $550,000 first mortgage and a $50,000 second mortgage.

Loan Type First Mortgage Second Mortgage Total Payment
Piggyback $550,000 @ 5% $50,000 @ 6%  $3,202
Jumbo $600,000 @ 5.5% n/a  $3,406

In this case, the home buyer might choose a piggyback loan due to the $200-per-month savings.

What are today’s jumbo mortgage rates?

Today’s jumbo mortgage rates are at historic lows. In recent months, the average jumbo mortgage rate is on par with conforming rates.

If you are in the jumbo loan market, you should shop and compare all of your options before deciding which is best.

Verify your new rate (Sep 24th, 2018)