The mortgage business has different rules when dealing with so-called “jumbo” loans, usually mortgage loans exceeding $417,000.
Jumbo mortgages are too large to be resold as securities to Freddie Mac or Fannie Mae, the country’s largest mortgage purchasers, or to be guaranteed by the Federal Housing Authority (FHA). In other words, the loans do not conform to rules set by those organizations.
Interest rates rise when loan underwriters are concerned about additional risk. Because jumbo loans cannot be resold to Fannie Mae or Freddie Mac, they are considered inherently more risky. Thus, they carry higher interest rates. Recently, jumbo loan interest rates have been as much as 3 to 5 percentage points higher than those for conforming mortgage loans.
The actual mortgage amount at which the jumbo rules kick in varies in different parts of the country. Because of special FHA rules enacted to spur the economy in 2008, mortgage loans as high as $729,750 are temporarily considered conforming loans in the highest-cost areas. A loan above that amount would be considered a jumbo mortgage, with a correspondingly higher interest rate.
Even though jumbo mortgages are considered nonconforming, they are the only way many families can buy homes in some parts of the country. With interest rates for conforming mortgage loans falling, lenders were beginning in the spring of 2009 to look at new ways to offer jumbo mortgages with more reasonable interest rates. The rates would remain higher than for conforming mortgage loans, but by a smaller margin.
To be eligible for more reasonable jumbo loan interest rates, buyers might be required to make larger down payments, or have additional cash reserves on hand.
Jumbo mortgages are available as either fixed-rate or adjustable-rate loans. The interest rate is generally lower on fixed-rate loans. But keep in mind the interest rate on a fixed-rate jumbo loan will still be higher than on a corresponding fixed-rate conforming loan.
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