Jumbo Mortgages

Three Pitfalls of Taking Out a Jumbo Mortgage


Most of the people who buy a home need a mortgage to pay off over time. But what if you buy a more expensive property? In this case, you may need to apply for a jumbo mortgage.

A jumbo mortgage doesn’t just mean a big mortgage. There are certain credit limits that will determine whether your mortgage falls into the compliant loan category or the jumbo category.

These limits change every year, but in 2021 the compliant credit limit for a single family home is $ 548,250. However, in some parts of the country the limit is $ 822,375. These areas include Hawaii and Alaska, where house prices tend to be higher.

A jumbo loan could be your ticket to the property of your dreams. But be aware of these disadvantages.

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1. You will generally get stuck at a higher interest rate

There’s a reason why high credit borrowers are rewarded with competitive mortgage rates. Since the risk to lenders is lower, borrowers can see some savings.

However, jumbo mortgages are inherently riskier than compliant loans because they involve larger sums of money. Therefore, jumbo lenders expect to be rewarded with higher interest rates for taking this risk.

As of this writing, the average interest rate on a 30-year fixed-rate mortgage is 3.164%. The jumbo mortgage rates, on the other hand, are 3.23%.

That might seem like a small difference. But if you borrowed $ 700,000 at 3.16%, your monthly payments would be $ 3,015 in principal and interest, and you would spend a total of $ 385,411 in interest when you paid off your home. At 3.23%, your monthly payment increases to $ 3,038 and your total interest increases to $ 393,679.

Of course, you can argue that an additional $ 8,268 in interest over 30 years is worth it to get more borrowing. But that assumes a modest interest rate differential. Depending on where you live and what your credit rating is, the difference between a compliant loan and a jumbo loan from an interest rate perspective can be greater.

2. You have to pay a larger deposit

When you take out a conventional mortgage, you can sometimes get by with a down payment of less than 20%. Not with a jumbo loan, however. Jumbo lenders will almost always require a 20% or more down payment, which means not only will you need to save more money before buying your home, but you will also need to tie up more money in that home to begin with.

3. You could expect higher closing costs

When you take out a mortgage, you pay a number of fees to complete the loan, known as closing costs. The closing costs are usually calculated as a percentage of your loan amount. So the more you borrow, the more you pay.

But some jumbo lenders may charge higher fees because, frankly, they can. The market for jumbo loans is more limited than conventional loans, so mortgage lenders don’t have to work as hard to be competitive. Therefore, a jumbo lender may charge you a higher application fee than you would pay for a compliant loan, which in turn could increase your overall closing costs.

A jumbo mortgage may be necessary when buying a more expensive home, and it isn’t necessarily something to worry or fear about if you can afford it. Be aware of these pitfalls before applying.

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