When you need to borrow a higher amount, currently more than $417,000, a jumbo loan or super jumbo becomes necessary. Because lending a higher amount of money comes with more risks, jumbo loans require a much higher interest rate than conventional mortgages. With super jumbo loans, one million or more is borrowed. Most banks cap jumbo mortgage amounts at six million.
Because the loan amount is higher than government standards, Fannie Mae and Freddie Mac will not back the full loan amount should the purchaser default. In any normal mortgage situation, Fannie Mae and Freddie Mac act as insurance in case of a defaulted loan. With jumbo loans, the banks are at risk of losing hundreds of thousands of dollars if you cannot meet your monthly payments.
Jumbo Mortgages
Jumbo mortgages are loans valued between $417,000 and $1 or 2 million. In the states of Alaska and Hawaii and United States territories like Guam and the U.S. Virgin Islands, the mortgage limits are fifty percent higher and currently set at $625,500.
Jumbo mortgages come in a variety of options:
- Adjustable Rate Jumbo Mortgages: Adjustable rate jumbo mortgages are perfect for those who are unsure they will stay in their home for a lengthy amount of time. The rates starting out are very low and increase or decrease based on the prime rate after a certain amount of time. If interest rates are falling, the monthly payment will decrease. The risk to adjustable rate mortgages is that the loan amount will increase if the prime rate increases.
- Fixed Rate Jumbo Mortgages: Fixed rate jumbo mortgages are the most common. Your interest rate and monthly payment is locked in when you close your loan.
- Interest Only Jumbo Mortgages: Interest only jumbo mortgages are a great way to keep your monthly payment down, but you will not build equity in your home unless you are paying extra to go towards principal.
- No Down Payment Jumbo Mortgages: Coming up with a substantial down payment on a new home can be troubling to many couples. With a no down payment jumbo loan, the financial institution finances 100 percent of the purchase price.
Rates for jumbo mortgages are usually higher, but if you have excellent credit it is possible to find jumbo mortgage rates that are comparable to standard fixed mortgage rates.
Though jumbo loans can be requested in any state throughout the United States, they are more common in states like California and New York where housing costs are extremely high.
Super Jumbo Loans
Super jumbo loans are required when a loan amount tops $1 or $2 million. Super jumbo loans are increasingly common in California where more than 25% of all homes are priced at $1 million or more.
Due to the high loan amounts, super jumbo loans are considered high risk. Payment amounts are extremely high and banks know if the borrower defaults, they are going to be stuck with a tremendous loss because Fannie Mae and Freddie Mac will not help out.
Underwriting processes for super jumbo loans are stricter. A solid credit score is best, but having poor credit does not necessarily mean you will not get approval for your super jumbo loan. Fees and interest rates will be higher, however. Most banks and financial institutions say consumers should expect interest rates to be ¼ to ½ a percentage higher.
Like jumbo mortgages, super jumbo loans come with options. Adjustable rates, fixed rates, interest only and no down payment mortgages are all available. Fees for super jumbo mortgages vary, but expect to pay around $1,000 in application and origination fees. Points also vary, most banks charge one point, but others may charge upwards of three.
