Mortgages in amounts that exceed the limits of Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs, that buy most mortgages in the US) are called “nonconforming” or “jumbo” home loans. As of this writing, that limit ranges from $417,000 to $625,500, depending on the property location. Borrowers who want to borrow more than $650,000 choose “super jumbo” home loans. Super jumbo loans can go into the millions, and borrowers must meet tougher guidelines to get them.
The market for jumbo and super jumbo home loans is a lot more fragmented than the market for so-called “conforming” mortgages — those that meet the guidelines of Fannie and Freddie. This makes them harder to shop for, and often more expensive.
Here are the most important things to know about jumbo mortgages:
- Unlike conforming mortgages, which are all underwritten to the specifications of the GSEs, jumbo and super jumbo mortgage guidelines differ from lender to lender. That’s because the investors who provide the money have a variety of objectives and tolerance for risk. This means if you’re turned down by one lender you shouldn’t assume that others won’t approve you.
- Jumbo lenders generally lend at lower loan-to-value ratios. That’s because there is more money at stake, and because it’s very difficult for jumbo borrowers to get mortgage insurance, which most lenders require when you put less than 20 percent down. Very large super jumbo mortgages may require as much as 50 percent down!
- Jumbo mortgage pricing varies by more than that of conforming loans. This is because they aren’t standard, and some lenders are willing to assume more risk in order to earn higher interest rates. A research company called MIAC found that while conforming loans vary on average by .25 percent between lenders, jumbo loans differ by twice that. This makes shopping around more important.
- When you need jumbo financing, expect to pay more than a conforming borrower. Why do they cost more? Pretty much the same reason that clothing for “big and tall” men costs more than the apparel bought by “regular” guys — it’s harder to find, it’s non-standard, and there are fewer providers. Jumbo loans can’t be sold to the GSEs like conforming loans. That makes them less liquid and more expensive to sell. The graph below shows the differences in APR (annual percentage rate) between jumbo and conforming mortgages from the same lender. In this case, all the jumbo options were more expensive. Sometimes, though, you can get a better deal on a jumbo loan — usually on 5/1 or 3/1 hybrid ARMs. It pays to shop carefully.
5. Small differences in rate can mean big bucks in your wallet. One fourth of one percent (.25%) might not seem like much when comparing lender offers. And for a $100,000 home loan, getting 4.00 percent instead of 4.25 percent saves you a whopping $15 a month. But the difference is about $75 a month if you have a $500,000 mortgage. Over 30 years, if you redirected that savings into a retirement account getting a five percent return, you’d have $60,755! That’s why your mortgage should be as important to your financial planning as your investments.
It only takes a few minutes of your time to compare jumbo mortgage quotes from competing lenders. And those few minutes might earn you a world voyage, cover college tuition or fund a more comfortable retirement.