Thanks to some interesting developments in today’s mortgage loan market, the average homebuyer is finding that purchasing a luxury home is more affordable than it has been in years. In 2008, after the housing market crashed and many American consumers found themselves in financial crisis, jumbo loans became virtually impossible to obtain. That simply isn’t the case anymore. Lenders have recognized and are responding to the increasing demand for larger loans. They are offering interest rates that are more financially feasible and terms that offer more flexibility.
What is a jumbo loan?
A jumbo mortgage is a home loan that exceeds the limit of conforming home loans. The typical limit for a conforming loan, which is set forth by Fannie Mae and Freddie Mac, is $417,000. That number slightly varies by county, but is never higher than $625,500. Keep in mind that the term “jumbo” has nothing to do with the actual price of the home. It refers strictly to the amount you intend to borrow.
What has changed to make jumbo loans more affordable?
Over the past decade, jumbo loans were reserved for the wealthiest consumers who also had a substantial reserve to cover potential interruptions in their income. During that time, if the average homebuyer wanted to purchase a home with a higher purchase price, they had two options:
- They could save enough money to apply a larger down payment.
- They could take out two mortgage loans to cover the total cost of the home.
Considering that we were, in fact, in the midst of an economic downturn, these options presented significant financial challenges. The decline in the market value of homes at that time also made it hard for buyers to obtain appraisals that would match the amount that they were asking to borrow. However, economic conditions have improved substantially, and home values are recovering. This has renewed lender confidence, causing a surge in jumbo product offerings. As a result, banks are competing for jumbo borrowers. Increased competition means better rates for you, the potential homebuyer.
Another key factor in the affordability of jumbo loans has to do with the climbing interest rates on conforming loans. Historically, interest rates were significantly higher for jumbo loans than they were for conforming loans. That is not necessarily the case today. In an effort to recover from losses suffered during the credit crisis of previous years, Fannie Mae and Freddie Mac have raised the fees that are charged on conforming loans. Of course, banks are not going to absorb this cost, so fees are transferred over to the borrower. On the contrary, these fees do not apply when taking out a jumbo loan, since Fannie Mae and Freddie Mac do not back the larger loans.
Jumbo loans have taken on an entirely new character, and the reputation they have earned in previous years is no longer valid. Jumbo loans are no longer a privilege reserved for the wealthiest of homebuyers. They are much more affordable than you think, which puts your dream of luxury home ownership one step closer to becoming a reality. If you think that a jumbo loan might be right for you, speak with your lender about available options.
About the Author: Michaela Phillips entered the mortgage lending industry in 1994. Throughout her 20 years in the business she’s been one of the top producers for every company she’s worked for. As of late 2013, she’s the VP of Mortgage Lending for Guaranteed Rate, Inc., the 8th largest retail mortgage company in the country. Being a VP at Guaranteed Rate offers many advantages to her and her clients, unparalleled customer service, efficiency, and most importantly, competitive rates.
She enjoys teaching her clients the pros and cons of being a Real Estate Investor, and more so, watching them build their Real Estate “Empires,” large or small, but all successful. For more info, visit her website, and follow her on Facebook & Twitter!