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Jumbo Loan: Is a non-conforming loan right for you?



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Mortgages that exceed the maximum limit set by Fannie Mae and Freddie Mac are called jumbo or non-conforming loans. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are government sponsored enterprises that buy loans from lenders and sell them to investors. They establish guidelines--including a maximum loan amount--for loans they are willing to buy. Loans that conform to their guidelines can be sold easily, so their rates are lower. Loans that don't are considered riskier, harder to sell, and are therefore more expensive. That makes jumbo and super jumbo loans (those exceeding $650,000) more difficult to get and more expensive as well.

Recently, Congress approved a temporary suspension of the current $417,000 loan limit to stimulate the housing market. In 20 of the most expensive metropolitan areas the Fannie / Freddie loan limits will be raised to amounts as high as $729,750. This change is a limited time offer and expires at the end of 2008. Borrowers living in high cost areas should consider closing on their loan in 2008. That's one way to beat the higher cost of jumbo home financing.

Disadvantages:  The increase as drafted is temporary, so borrowers who want to take advantage will need to move quickly. Some analysts have argued that by increasing the risk in the normally low-risk conforming pool it could make investors require a greater rate of return and thus raise rates for borrowers with lower loan amounts.

Advantages: By making jumbo financing more affordable, the increase could motivate buyers in higher-cost areas to buy homes, helping dry up the excess of property on the market, stabilizing the housing industry and a big part of the U.S. economy.

Those who won't benefit from the conforming loan amount increase can lower costs by opting for hybrid ARMs like the 5/1 program. The rate is fixed for the first 5 years of the loan and is usually considerably lower than that of the 30 year fixed jumbo mortgage. In fact, most lenders offer the best ARM pricing and terms to the jumbo borrower and charge more for conforming loan amounts. In this case the jumbo loan seeker gets the preferred status and the better rate.

An important characteristic of jumbo loans is that they are less homogeneous than conforming loans. That means that there is greater variation in rates and terms from region to region and from lender to lender. Shopping with different lenders from many parts of the country is easy to do online and the borrowers' effort could be generously rewarded.
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