Jumbo loans — that is, loans for more than $417,000 — are a different kind of entity than normal loans. Because the amount of money involved in a jumbo loan is so large, banks automatically assume they are more risky than normal loans. Because of the added risk, banks add to the interest rate of jumbo loans and they require a much stricter background check before they’ll be approved.
Those are both bad things for you as a buyer. Jumbo loans tend to have rates about 1% higher than normal loans given the same circumstances, but 1% is a number that can be ameliorated or even entirely overcome by a combination of shopping around or paying a little extra each month on your mortgage.
The stricter background check is also not entirely a showstopper, but it’s harder to get around. Basically, the only real way to reduce the severity of the background check is to bring a large down payment — like 30% to 50% of the home’s value — to the table. Even if the rate for the jumbo loan is for the same as it would be without the large down payment, being able to pony up a significant amount up front will always impress the banker man.
So when do you need a jumbo loan? If you are buying a home and financing for $417,000 or higher, then you cannot get a conventional Fannie Mae loan. So unless you use some creative financing where you use seller financing or a 2nd mortgage for part of the principal, you will likely need to take out some sort of jumbo loan. But there are some options – you can get a jumbo loan that is either fixed rate or adjustable.
The fixed rate jumbo makes sense if you are planning on being in the house for an extended period and you are happy with the current interest rate you are paying. A 5/1 (5 year) or 7/1(7 year) jumbo adjustable rate mortgage (ARM) may make sense if you tend to move around frequently and don’t foresee yourself living in the home for too many years.
In today’s economy, it’s a tough call which way to go, and really depends on your individual circumstances. Even having to pay a point or so higher than a conventional loan, the today’s interest rates are still really good. So unless you are nearly certain you will be moving within the next 7 years, a fixed rate jumbo loan is probably the way to go.
About the Author
This is a guest blog post from Richard Simon, Co-Founder of Realty AZ Central. Realty AZ Central is a Phoenix Arizona based real estate marketplace offering a host of home buyer and seller resources including home selling tips, mortgage lender referrals, and a local real estate agent network.