Today’s Best Jumbo Home Loan Rates
- What is a Jumbo Mortgage? – qualification standards how these loans compare against standard conforming mortages
- Conforming Mortgage Limits – loans above these limits are considered jumbo
- Jumbo Mortgage Calculator – calculate your monthly loan payments
- What Drives Mortgage Rates? – understanding how interest rate markets are set
- The Global Recession – and how it impacted the housing market
- Rate Normalization – and how it may impact the housing market
Fannie Mae Freddie Mac are government-sponsored enterprises which provide liquidity to the national mortgage market by buying mortgages and keeping them in their portfolios or packaging the residential mortgages into mortgage-backed securities (MBS) sold to secondary investors. They have limits on the size of the residential mortgages they package into securities. Jumbo mortgages are loans which back home purchases where the amount financed exceeds the conforming mortgage loan limit.
Jumbo does not refer to the size of the house, but rather the amount of the loan. Many coastal properties are highly valued even if they are not physically large dwellings.
the distinction between jumbo and super jumbo is also based upon the amount of the loan. Lenders internally determine where they set classifications. In many parts of the country $1,000,000 is the demarcation line, but in wealthy areas the floor for super jumbo might be closer to $1,500,000 or $2,000,000.
Jumbo Rates vs Conforming Mortgage Rates
Jumbo mortgages have higher risk to the lender and lower liquidity in the marketplace. Historically lenders have typically charged higher rates than on conforming mortgages, though as the recovery has continued that gap has shrunk and there have been brief periods where yields on jumbo mortgages were lower than conforming mortgages. Prior to the 2008 recession jumbo loans had a spread of about 0.2% against conforming loans. During the crisis this spread blew out to a peak of about 1.7%, but has since come down to where jumbo mortgages are similarly priced to conforming mortgages.
Jumbo loans can be structured as either fixed or adjustable rate offerings, and yields tend to be similar to the associated conforming options. The most common adjustable rate option is the 5/1 ARM but other options exist including 5/5, 7/1 10/1.
For the first two loan types it means the interest rate would remain the same for the first 5 years of the loan. Then on the first loan the interest rate could reset annually after that, whereas on the second loan interest rates would reset every 5 years. The third and fourth examples would have a set rate for 7 and 10 years respectively and then reset annually. Adjustable-rate mortgages adjust based upon a spread off a reference rate such as LIBOR, up to a pre-determined rate cap in the loan contract.
Lenders create their one underwriting guidelines for jumbo loans. As part of that process, borrowers may have to produce bank statements over the past year along with W2s, and 1099s. Self-employed people may need to show two years of tax returns. Lenders also typically want to see
- the borrower has a 6 to 12 month cushion in savigs to cover note payments,
- a FICO credit score of at least 680 to 700, and
- a debt-to-income ratio below 40% to 45%
A second appraisal of the home may also be required to verify its value.
The additional information needed to qualify a borrower means that closing costs are typicially higher on jumbo mortgages than on conforming loans.
On conforming mortgages about 35% of borrowers put at least 20% down. On jumbo mortgages down payments of 5% or 10% are quite common.
Most jumbo loans do not require PMI payments, however borrowers with a small downpayment may incur additional fees and get charged a higher interest rate. The higher rate of interest is a way lenders can self-insure the loan, charging the equivalent of PMI for those with small down payments. Those who are buying a second home with a jumbo loan will typically be required to show more reserves and have better credit.
Second Mortgage Option
Some borrowers who struggle to secure a jumbo loan may be able to qualify for a conforming loan and use a second piggyback mortgage plus put more cash down to get below the conforming loan limits, which are $424,100 for a single-family home throughout most of the country and $636,150 in designated high-cost areas. Piggyback loans are typically issued for 10% to 15% of the property purchase price and come with a slightly higher rate of interest since the primary mortgage has the first claim on any default. In most cases second mortgages use adjustable rates, but fixed rate options are available at slightly higher rates.
Homes backed by jumbo loans should be fully insured to protect against natural disasters. Most insurance policies do not cover earthquakes or flooding by default, so supplemental policies may be needed.
In 2017 homeowners are able to deduct from their income interest expenses on up to $1 million dollars of mortgage debt. At a 4.25% interest rate, a homeowner would pay $42,174.13 in interest during the first 12 months. That compares against the following standard deduction amounts.