Picking the Right Mortgage
Is a Jumbo Loan the Right Mortgage for You?
You’ve no doubt heard of Fannie Mae and Freddie Mac, the two giant government sponsored mortgage corporations. Their primary function is these two companies is to increase the access to money for home purchases for the average home buyer. In later blog posts, we’ll discuss some of the ways these companies have changed the mortgage landscape. For now though, Fannie Mae and Freddie Mac simply get money from investors and then lend it to consumers. Fifty years ago, this lending was done by the banking industry, who was restricted to lending against deposits. These types of loans are known as ‘conforming loans’, in part because of the rigorous requirements the companies require.
A jumbo loan however has significant differences and in many cases, considerable upsides.
Conforming loans are subject to loan limits and are adjusted yearly based on the state you live in. This number is generally arrived at by averaging market prices. In all but Hawai’i and Alaska (as well as the U.S Virgin Islands and Guam) the limit is currently $417,000. If the mortgage you are looking for is less than that amount (or $625,000 in the two states and territories mentioned previously), you must submit to the rules of a conforming loan.
But once the mortgage exceeds that amount, the loan becomes a jumbo loan. How do you know whether a jumbo mortgage is the right choice for you? The answers may seem simple but I highly advise discussing it with a mortgage professional.
First off, if your salary is adequate and your ability to pay the mortgage are verifiable, a jumbo loan will allow you to get into the house without many of the borrowers looking for a conforming loan down payment requirements. In some case, the debt-to-income ratio is more flexible. But keep in mind, no document loans are a thing of the past. The flexibility I’m referring to may allow the borrower to qualify even with some complex income structures or self-employment situations. A loan professional can help with those details.
The down payment on jumbo mortgages has been undergoing several changes since the beginning of 2014. Interest only loans, loans that pay only principle in the initial years of the loan have become more difficult to acquire. Balloon mortgages, the type of financing that has a low initial monthly payment with the loan coming due in full, usually after five years are no longer available. What has changed in favor of the borrower is the percentage of down payment that is required. It has fallen steadily from 35% to 20% and with some lenders, the down payment has been reduced to 15%. Some experts expect that to go even lower. This may keep some assets in place for future growth while allowing you to get into the house sooner, building equity faster.
Lastly, there is the tax advantage. The jumbo mortgage is tax deductible up to $1.1 million
A jumbo mortgage may be right for you if you have documented income and assets, want to keep more of the down payment money in your pocket, and are interested in getting in sooner rather than later.