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Jumbo Loan

The Jumbo Loan is defined as the mortgage with a loan amount in excess of the conforming loan limits stipulated by the Office of the Federal Housing Enterprise Oversight (OFHEO). So quite naturally, these kinds of loans are not eligible to be purchased, guaranteed or securitized by the US mortgage lenders Fannie Mae or Freddie Mac. This is also referred to as Jumbo Mortgage. The conforming loan limits are set by the OFHEO on an annual basis.

Sometimes, the jumbo loans are securitized by financial institutions other than Fannie Mae or Freddie Mac. But these are surely more risky than the securities issued by Fannie Mae or Freddie Mac and trade at a higher interest rate than the conventional mortgages. In recent times, however the spread in interest rate between jumbo and conventional mortgages has narrowed down.

The Risks & Costs Associated with Jumbo Loan

The Jumbo mortgage loans pose a higher risk to the lenders. In case of default in mortgage loan, it may be indeed difficult to sell a luxury residence quickly for a full price. In many cases, luxury prices are more vulnerable to market highs and lows. This is because of the following reason. The lenders generally prefer to have a higher down payment from the jumbo loan seekers. The Jumbo home prices can also be more subjective and can not be easily sold to a mainstream borrower. Because of this reason, many lenders may require two appraisals on a jumbo mortgage loan.

The interest rate associated with Jumbo mortgage loan is generally higher than a conforming loan. This is because of greater risks to the lender. The difference between these two rates, which is also known as spread, depends upon the current market value of risk. Generally the spread moves around between 0.25 and 0.5%. Generally, it is comparatively costly to refinance a jumbo loan because of the closing costs

Loan Limits

According to the US Department of Housing and Urban Development, jumbo mortgage loan does not conform to limits set by key lenders such as Fannie Mae and Freddie Mac. Though it was in decline during the housing market troubles of 2008 and early 2009, but it recovered well. According to the Wall Street Journal, again the typical housing lenders, mainly the private ones, are promoting the jumbo mortgage loans once more in the market.

Conforming Loan Limits

The conforming loan limits for a single-family home set by the government lender, Fannie Mae, for 2009 are $417000 for a single-family home in the neighboring United States. The limit is $525000 in the areas of the country where the costs of living are relatively high. In single-family home in the cities of Alaska and Hawaii, the limit is $625000. This limit for same type of home in the areas where the costs of living are relatively higher is $938250

Avoiding the Limit

According to mortgageloan.com, mortgages that exceed loan limits are burdened with higher loan rates, nearly a quarter of a percentage point more. Some homeowners have been able to secure two mortgages on one property. Major part of the borrowed amount would be on the first mortgage with the second mortgage is targeted at to avoid jumbo rates.

Jumbo Loan Impact

The National Association of Realtors (NAR) has done considerable research on the limited availability of jumbo loans and their effect on the market. According to a study by NAR, the lack of availability of jumbo loans is responsible for the continued slowdown in the market

Rates Stay High

The high prices of real estate as well as higher cost of living in important places such as Miami, New York and Los Angeles, have resulted into even normal family homes are being purchased with jumbo loans. According to the Boston Globe, some homeowners with jumbo loans are trading with 7% rate of interest while individuals with conforming mortgage loans are getting rates as low as 5%. The NAR is clamoring for the government to intervene in to jumbo mortgages in the similar way that it buys mortgages in order to cut down the jumbo interest rates.

Advantages of Jumbo Mortgages

This is often preferred by the borrowers who are not in a position to secure other categories of mortgages because of several financial restrictions. Some borrowers who are not eligible for fixed or adjustable rate of mortgages and who look for a higher limit than offered by FHA loans often prefer these loans as alternatives.

In the United States, these loans have a relatively negative reputation. Despite this negative impression of the Americans, there are some distinct advantages to secure a jumbo mortgage. The most obvious advantage is that the loan limit is higher than the loan limits of traditional mortgages. So quite naturally, the jumbo mortgages considerably increase the number of options a potential homeowner can choose from. Another advantage associated with jumbo loans is that the borrowers have to deal with one lending institution. Other types of loans often operate through multiple financial institutions such as the FHA, other government bureaucracies as well as private lending institutions.

Mortgage Calculator

The right mortgage should have proper monthly payment for your particular financial situation. The mortgage payment calculator ensures that you have got the right match. It smartly calculates the potential monthly payment taking into consideration information related to loan and property. It also takes into account details regarding insurance and tax. If you input these details in the calculator, you will quickly get to know whether the loan amount is within your budgetary limit or not. These calculators are indeed very easy to use. In the first step, what you need to do is to input information in four fields—loan amount, interest rate, length and home value. The loan amount is the amount of money one needs to borrow. The interest rate is advertised by the lender. The home value is nothing but the estimated price of the house. The length is the amount of time it takes to repay the loan amount. In the second step, one has to provide information on annual taxes, annual insurance and annual PMI. After performing these steps, you will get to know about your potential monthly payment.

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