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Jumbo mortgages
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In the United States, a jumbo mortgage is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits. This standard is set by the two largest secondary market lenders, Fannie Mae and Freddie Mac. Loans above the conforming limits may be offered by seller servicers of these wholesale institutions, as well as Wall Street conduits who provide warehouse financing for mortgage lenders.
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In the United States, a jumbo mortgage is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits. This standard is set by the two largest secondary market lenders, Fannie Mae and Freddie Mac. Loans above the conforming limits may be offered by seller servicers of these wholesale institutions, as well as Wall Street conduits who provide warehouse financing for mortgage lenders. The loan amounts reflect average loan sizes nationwide. Jumbo mortgages apply when agency (FNMA and FHLMC) limits don't cover the full loan amount. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of residential mortgages in the U.S. They set a limit on the maximum dollar value of any mortgage they will purchase from an individual lender. , the limit is $417,000, or $625,500 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Other large investors, such as insurance companies and banks, step in to fill the need, with maximum mortgage amounts going to the $1 million or $2 million range. A loan in excess of $650,000 is referred to as a super jumbo mortgage. The average interest rates on jumbo mortgages are typically greater than is normal for conforming mortgages, and vary depending on property types and mortgage amount.
On February 13, 2008 President Bush signed an economic stimulus package that temporarily increases the conforming limit to $729,750 until December 31, 2008. The limit for any area would be the greater of (1) the 2008 conforming loan limit ($417,000); or (2) 125% of the area median
house price, but no more than 175% of the 2008 conforming loan limit ($729,750, which
is 175% of $417,000)
The value of raising the limits to these levels is questionable. The secondary paper market (resellers/buyers) have not freely adopted these new limits, making them essentially "theoretical."
Risk
Jumbo mortgage loans are a higher risk for lenders. This is because if a jumbo mortgage loan defaults, it is harder to sell a luxury residence quickly for full price. Luxury prices are more vulnerable to market highs and lows. That is one reason lenders prefer to have a higher down payment from jumbo loan seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan.
The interest rate charged on jumbo mortgage loans is generally higher than a loan that is conforming, due to the slightly higher risk to the lender. The spread, or difference between the two rates, depends on the current market price of risk. While typically the spread fluctuates between 0.25 and 0.5%, at times of high investor anxiety, such as August 2007, it can exceed one and a half percentage points.
Loan options
Jumbo mortgage loan options are similar to traditional loan programs. They simply require a slightly higher down payment, usually of an additional 5% for similar program types. No-money-down programs are generally not available, but instead require a minimum of 5% down payment for a jumbo mortgage. 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 be more expensive to refinance a jumbo loan due to the closing costs. Some lenders will offer the service of an extension and consolidation agreement, so that a jumbo refinancer will not have to pay for mortgage tax again on the same principal balance. In other cases, title insurance companies will offer up to a 50% discount, often required by law for those refinancing within 1 year to 10 years. The largest discount is for refinancing within one year.
Some consumers seeking a jumbo mortgage choose to seek advice from a competent professional familiar with jumbo mortgage loans.
Recent trends
Due to increased housing prices, there is a large increase in the number of jumbo loan applicants. Many consumers are becoming jumbo borrowers when buying a modest ranch or Cape Cod house; this option is no longer limited to high-end luxury residences.
New loan programs are now offered to address the large increase in jumbo loan applications. Because of the steep price increases during the recent years (2000-2006), mortgage loans are required in excess of the conforming limits in most big-city areas or their surrounding suburbs. The new loans are either a 40- or even 50-year amortization, or an interest-only option. They allow the jumbo loan borrower to pay the loan back over a longer period of time, or to defer any repayment of principal for a few years—thus saving them on their monthly payment. In some cases, the banker makes a larger profit if the loan takes more than 30 years to repay.
Popular Programs Avoid Costly Private Mortgage Insurance ("PMI")
80/20 & 80/15 jumbo loan programs are very popular with new home purchasers. Because any borrower with less than a twenty percent down payment was previously subject to purchasing private mortgage insurance (PMI) to insure the lender for the higher risk, jumbo borrowers were previously paying a very large PMI fee on a loan with an LTV (loan-to-value ratio) higher than 80%.
Now, the jumbo borrower can borrow the 80% without PMI, and take a second mortgage at a slightly higher intererst rate, which does not require PMI, and hedges the risk of the first position lender at the lower interest rate.
However with recent foreclosures on the rise lenders have turned away from 80/20 loans and very few zero down loans are available both for jumbo and conforming loans. Many lenders are offering LPMI (Lender Paid Mortgage Insurance) options that build the PMI into the interest rate. So by taking a slightly higher interest rate the borrower can avoid PMI altogether even if they are only putting 5-15% down payment. This will effectively reduce the monthly payment for the short term - but overall the higher rate may not be the best option because many times the standard PMI can be dropped after the homeowner has over 20% in equity.
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