Jumbo Loans

So you’ve got your eye on a luxury property? Well, you must be doing fairly well for yourself. Congratulations. Of course, even the wealthiest homebuyers usually take out a mortgage for the purchase of a home. Very few people can afford to simply hand over a huge sum of money up front.

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Unfortunately, Fannie Mae (FNMA) and Freddie Mac (FHLMC), the largest federal mortgage purchasers in the US, set limits on the amounts they are willing to cover. At the time of writing this limit is $417,000. Any mortgage valued at above this limit is termed a “jumbo loan,” and the buyer may find that if they take out one of these jumbo loans they may incur a higher interest rate than would be expected with a standard home loan.

The reason for this is that there is a much greater risk to the lender in mortgaging a luxury property. If the borrower defaults on the loan and the lender repossesses the home as collateral, it can often be much more difficult for the bank to sell the property for its true market value. The prices of luxury homes fluctuate much more than in the general property market, meaning that the lender will likely swallow a loss on the deal.

The interest rate on a jumbo loan will usually be between .25 and .5% higher than usual as the mortgage must be covered by private interests, such as insurance companies and banks. Since these institutions are much more conscious of profit and loss than the federal government, they demand the higher interest rate and usually a minimum down payment of 5%.

If you are in the market for a property that would require a jumbo loan you should discuss your options with a loan adviser after all, making a poor choice on a jumbo mortgage could cost you tens of thousands of dollars in the long run.