Simply stated, a jumbo program is a loan that exceeds conventional conforming loan limits. Conventional conforming loan limits are established by Fannie Mae and Freddie Mac, and these loan limits set guidelines regarding the maximum value of individual mortgages that these institutions will purchase from lenders. When borrowers utilize a jumbo program, Fannie Mae and Freddie Mac will not cover the full loan amount. Loans through a jumbo program usually have a higher interest rate than traditional conforming loans because they are inherently higher risk loans for lenders. However, the interest rates between a jumbo loan and a conventional conforming loan can vary based on the economy. Borrowers seeking to purchase a home or property exceeding $417,000 will need to utilize a jumbo program.
Types of Jumbo Programs Available
There are several types of loans available under a jumbo program, and borrowers can determine which type of loan will be best suited for their individual situation. Three of the most commonly utilized jumbo programs are: fixed rate loans, adjustable rate mortgages, and interest only jumbo loans.
Fixed Rate Jumbo Loans
Fixed rate jumbo loans provide borrowers with the security of know how much their monthly payment will be. Because the interest rate is fixed, borrowers do not have to be concerned with their monthly payment increasing or decreasing due to fluctuating interest rates. Fixed rate jumbo loans are ideal for borrowers that intend on living in the home without refinancing for a long period of time.
Adjustable Rate Mortgages
Jumbo loans with adjustable rate mortgages are similar to traditional adjustable rate mortgages. These types of loans will have variable interest rates based on market indexes and lender margins. Adjustable rate mortgages will have a fixed interest rate for a set period of time, usually between 6 months and 10 years. At the end of this period, the interest rates may vary. This variance could affect monthly payments substantially.
Interest Only Jumbo Loans
Interest only jumbo loans offer borrowers a low monthly payment. Monthly payments are low because with this type of loan borrowers are not making any payments toward the loan principal. The payment made each month is applied only to the interest on the loan. The interest-only period of the loan usually ranges between 5 and 10 years. At the end of the interest-only period, borrowers will have to pay the lump sum due or refinance the loan.
There are other various jumbo programs available to borrowers, but jumbo loans may only be appropriate in certain situations. Jumbo loans are typically utilized by home buyers that need to finance a property that has a higher appraised value. Home buyers that use jumbo loans also have the financial resources needed to afford larger monthly payments.
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