Jumbo Mortgages May Mean Jumbo Headaches

Jumbo mortgages are loans used to buy homes that are expensive enough to require exceptionally large mortgages. Each year, the government determines the minimum mortgage amount that defines \"jumbo,\" and home buyers requiring loans beyond that level can wind up paying higher mortgage rates.

Conventional loans meet certain underwriting guidelines to ensure that they\'ll be easy to resell by Fannie Mae, the Federal National Mortgage Association, by investors. But huge home loans, that exceed a certain amount, fall outside those guidelines and are defined as \"jumbo.\" Each year, the government sets the upper limit for conventional loans, which is based on prevailing housing market prices. (Right now, the current jumbo kicks in at $417,000.) If you borrow that amount or more, your lender will charge you a higher mortgage rate, because non-conforming or non-conventional loans represent greater risk to lenders.

Avoiding jumbo loans

For that reason, most borrowers try to avoid the headache of jumbo loans altogether. One way to avoid it-as long as the amount you need is close to the jumbo minimum limit-is to combine a second mortgage with a first mortgage. For instance, if you needed $425,000 you could borrow with a conventional mortgage of $400,000-slightly under jumbo status-and get a second mortgage for the balance. You\'ll need to pay a higher mortgage rate for the second mortgage portion, but because it\'s so small, it will be much cheaper than borrowing the entire $425,000 at jumbo rates.

Consider a mortgage refinance

If you already have a jumbo loan, you may want to refinance it to qualify for a lower rate. For instance, if you borrowed $400,000 at a fixed rate in 2004, that loan was considered a jumbo. If you refinance that amount now, your mortgage will qualify as a conventional loan, because the guidelines have been raised.

For a 30-year fixed-rate jumbo mortgage, you\'ll probably pay one-eighth to one-quarter of a percent more, though in some circumstances, the difference may be even greater. At those higher rates, consumers applying for jumbo loans are faced with mortgage rates comparable to those associated with bad credit mortgages. And regardless of whether your jumbo is an adjustable-rate or fixed-rate mortgage, higher rates apply. By refinancing to a conventional loan, you\'ll incur closing costs, but reducing your rate might save you tens of thousands of dollars over the life of the loan and alleviate a jumbo financial headache.

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This entry was posted on Tuesday, August 19th, 2008 at 9:06 pm and is filed under Mortgage Rate Refinance . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.