The US housing market is scorching red hot – prices for May 2021 were over 23% higher than the previous year and in some markets, prices have shot up even higher. With prices skyrocketing, more homeowners will need to consider non-traditional, jumbo loans to cover the cost of buying a home. Let’s take a look at the pros and cons of jumbo mortgages so you can make a decision that works for you.
What is a Jumbo Loan?
A jumbo loan is a mortgage that is larger than the conforming loan limit set by Fannie Mae and Freddie Mac. The current conforming limit is $548,250 in most counties and up to $822,375 in certain higher-cost areas. That means that if you are buying a house that costs more and need a loan in excess of these amounts, you will need to get a jumbo loan.
The Benefits of a Jumbo Loan
One of the key benefits of a jumbo loan is that it allows you to buy a house that is more expensive. With prices at record highs, many consumers will need jumbo loans to attain their dream of home ownership.
The Downsides of a Jumbo Loan
Because jumbo loans are also available to people whose needs fall outside of the normal lending guidelines set by Fannie Mae and Freddie Mac, if you have a less than perfect credit score or a history of late payments, you may not be able to qualify for a jumbo loan.
If you are buying a house with a very low down payment, a jumbo loan may not be a good option for you. The minimum down payment for a jumbo loan is 10%, although it is more common to have a down payment of 20%. This will depend on the lender.
One of the biggest downsides of a jumbo loan is that it typically comes with a higher interest rate. The interest rate on a jumbo loan may be as much as 1% higher than the interest rate on a traditional 30-year fixed-rate mortgage.
The higher interest rate is the result of the higher risk associated with jumbo mortgages. Federal regulators do not have any rules for jumbo loans. That means that lenders have to make their own rules. Many lenders are very strict in their underwriting. Again, that means that if you have less than perfect credit or a history of late payments, you may have a difficult time qualifying for a jumbo loan.
How to Compare Jumbo Loans
There are many different types of jumbo mortgages, including fixed rate mortgages, adjustable rate mortgages and interest-only mortgages. You should compare the rates and terms of all of your options before making a decision about the type of loan you are going to get.
Fixed Rate Mortgages
A fixed rate mortgage means that the interest rate will not change during the life of the loan. Fixed rate mortgages are a great option if you plan to live in your home for more than 5 years.
Adjustable Rate Mortgage
An adjustable rate mortgage means that the interest rate will change during the life of the loan. Adjustable rate mortgages tend to be a good option for people who plan to sell their home in less than five years, but can be dangerous because your payments can increase after a certain date.
An interest-only mortgage means that you will only be paying the interest on the loan for a certain amount of time. The positive is that your upfront costs will be lower for a certain amount of time, but this is not generally recommended for most homebuyers. If you are only paying interest, you are not accruing equity in the house. This type of loan will be more expensive in the long run for the majority of buyers.
Jumbo loans are a great, and necessary option for homeowners who wish to purchase an expensive home. Their drawbacks, however, make them an option that should only be considered by high-income buyers with good credit. If you are interested in discussing whether a jumbo loan is right for you, our expert loan officers here at Cross Timbers Mortgage are here to help! Set up an appointment with a member of our team today and we will walk you through the process of getting prequalified for your dream home today!