Have you been shopping for a mortgage? Is the loan amount you'll need higher than $417,000? If so, you have entered Jumbo Mortgage territory. Beware. . . higher interest rates ahead.
Jumbo Mortgages are mortgages that are higher than Fannie Mae and Freddie Mac's conforming loan limit of $417,000. What that means is that Fannie and Freddie will only purchase home loans from lenders that are equal to or less than $417,000. That's where they draw the line in the sand.
Once a buyer's home purchase requires a mortgage great than $417,000, a lender will need to seek out a different group of investors to purchase that loan.
Because of their size, Jumbo mortgages carry a reputation in the investment community of being less conservative, safe investments than smaller loans placed on more mainstream housing. The fact is that those who can afford Jumbo sized mortgages are typically “strong borrowers" with more money in the bank, higher credit scores, greater job stability, and higher income than those who can't afford them.
Nevertheless, the more risk, perceived or otherwise, that investors see in a loan, the less they are interested in purchasing it. And the less interested an investor is in purchasing the loan that a lender needs to sell, the bigger the carrot that lender needs to dangle in order to persuade that investor to move forward. That bigger carrot turns out to be a higher rate of return (interest) for the investor. It's simple business 101. . . higher risk jumbo loans necessitate a higher rate of return to offset that risk for the investor.
Compounding the situation is that fact that the pool of investors for Jumbo-sized mortgages is also smaller than the pool of investors for non-jumbo loans. Because there are fewer investors in the secondary market for jumbo loans, this becomes another reason why lenders offer higher interest rates to attract those investors to purchase these loans.
The end result for you the jumbo mortgage borrower? There will be a ¼ to ½ point, or .25% to .50% difference between the interest rate on a conforming loan (< or = $417,000) and that of your jumbo loan. That means that if the rate available to you on a conforming loan at a given time is 6.50%, the interest rate on your Jumbo mortgage will be approximately 6.75% to 7.00%. Unfortunately, the rate premium just goes with the territory.
John N. Moneypenny is a Jumbo Mortgage Specialist with SunTrust Mortgage in Atlanta, GA. He is also a Certified Mortgage Planning Specialist (CMPS) and an expert in advising clients on how to incorporate their mortgage as a financial instrument into their long and short-term financial plans so as to minimize taxes, increase cash flow, and reduce interest expense. A former two-time All-American tennis player in college, former USPTA Tennis Professional (P-1), and active AA-4 ALTA participant, John specializes in serving the Atlanta community in meeting its need for jumbo mortgages and financial planning advice. John and his wife of 20 years, Marcy Moneypenny, a Senior Director with CB Richard Ellis, live in Alpharetta, GA. John can be reached at 404-303-2621 or by e-mail at firstname.lastname@example.org