Choosing a mortgage takes a lot of research and understanding of how it will affect your finances. It's important to learn about the different mortgage types before deciding on one. Even more important is to figure out how big of a loan you will need and how much you can afford to pay each month.
Typically, for an average single-family home, a conforming mortgage is enough. A conforming mortgage is one that doesn't exceed the amount of money dictated by government-sponsored enterprises Fannie Mae and Freddie Mac. That dollar limit has been $417,000 for a single-family home in most parts of the United States for nearly a decade. Fannie Mae and Freddie Mac recently announced this limit will remain unchanged in 2016, with the exception of 39 specific counties. The amount is higher for homes meant for multiple families, or in areas where the average home prices are higher. In these areas, the limit could be as high as $625,500 for a single-family home. The 39 counties in which conforming loans are higher are primarily in California, Colorado, Massachusetts, New Hampshire, Tennessee and Washington. Lending limits are announced each year, though it has mostly remained unchanged since 2006, HSH.com reported.
"Loans higher than $417,000 are considered jumbo loans in most counties."
Jumbo loans, explained
Any loan under the determined amount is eligible to be bought by these government-sponsored organizations. If a loan is higher than the government-sponsored lending limits, it is considered a jumbo loan. Fannie Mae and Freddie Mac won't buy these from lenders. Instead, lenders will either keep the loan themselves or seek outside investors or banks to purchase them, The Wall Street Journal explained. These outside investors buy them on the secondary market in securitized bundles.
According to The Washington Post, about one-quarter of mortgages in 2014 were jumbo mortgages. In the first quarter of 2015, 1 in 5 mortgages originated were jumbo, the Wall Street Journal reported. While these large loans became scarce after the financial crisis in 2008, the market has seen some recovery.
Many of these are for homes in California, Florida, Connecticut and the Carolinas. Some people may seek jumbo loans for a luxurious home, while others may want a coastal vacation home. Bankrate reported that many of these loans go toward condominiums. Some Connecticut communities have condos with valuations of $600,000 or more. While jumbo loans typically mean more expensive homes, they can also result in relatively low rates. Interest rates on jumbo loans are some of the lowest they've been in a long time.
Requirements and options
Like any other mortgage, jumbo loans have a set of requirements borrowers must meet to qualify. Since jumbo loans are for a larger amount and because they don't conform to government loan standards, they may have stricter requirements. Bankrate explained that borrowers' credit scores usually must be above 700, and a larger down payment may be needed to secure the loan. Loan originators will likely ask borrowers to show statements of income and assets that demonstrate their ability to afford the payments on the jumbo loan. The Truth About Mortgage also explained that mortgage rates on jumbo loans are typically up to 0.5 percent greater than a conforming loan.
Jumbo mortgages have many of the same term options as conforming loans. Adjustable-rate jumbo mortgages are available as well as fixed-rate options. Many borrowers may prefer adjustable-rate mortgages when interest rates are high. For jumbo loans, a small change in interest rates can mean thousands of dollars in savings if consumers chose to go with an adjustable-rate mortgage.