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Should you take out a Jumbo Loan or is there an Alternative?

Posted by janepeters on May 21, 2013
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To Jumbo or not to Jumbo, that is the question.

Many of my Chicagoland referral partners have been reporting that their higher-end housing markets are seeing healthier sales this Spring.  Finally!  Our local housing markets are healing!  All very good news.

Paired along with that is even more good news.  Lending options are once again appearing for high-end real estate purchases and refinancing.  “Jumbo” loan options are re-emerging.Should I get a jumbo loan when buying a Los Angeles home?

But what is considered a “Jumbo” loan?

Like so many other questions concerning mortgage financing, there is no one easy, quick, across-the-board answer.  But let me start by saying, a “Jumbo” loan is also known as a non-conforming loan.  That means it is “not eligible for Fannie Mae or Freddie Mac acquisition“.

The threshold amount considered a “Jumbo” loan varies by state, or even market areas … but in most regions the maximum amount considered to be “conforming” is$417,000.  So, a “Jumbo” is higher than that amount, even if by one dollar.

The mere fact that a loan can be moved or sold via Fannie Mae or Freddie Mac guidelines, translates to more liquidity and lower interest rates.  “Jumbo” loans are sold to Private Investors, other banks, hedge funds, or even kept in a private portfolio for the source of the loan.  When the loan is kept and not sold, the rates end-up higher, as there is no one else, no entity, to free-up the money lent out.

Because of this fact, loans considered “Jumbos”, are higher in Interest Rates by 3/8% to a full 1% (in extreme cases) over conforming loans ($417,000 and less).  So depending on the Sales Price, the Buyer’s down payment ability, and the eventual loan amount … I typically will look at other financing options to a “Jumbo” loan.

One of these options is a 1st Mortgage at the conforming loan limit (remember: $417,000), coupled with a simultaneous 2nd Mortgage of as much as $250,000 … or whatever loan amount is needed to meet the needs of the Borrower’s transaction.  
Second mortgage vs jumbo loanFor example only; consider the following:   

(Current comparison Interest Rates utilized)

      
     Sales Price:               $800,000
     Down Payment:     $200,000  (from Borrower – 25%)
     Loan Needs:             $600,000  (eligible to be called a  
“Jumbo” loan) 
     
And here’s why I’d consider offering the two loan options to my Borrower, versus just one “Jumbo” loan.

Monthly Payment, if figured as a “Jumbo” loan:   
$2,995.71    (Principal & Interest Only)

    

Monthly Payments, if figured with a 1st & 2nd loan: 
1st Loan Payment on $417,000:      
$1,931.19  (Principal & Interest Only)
2nd Loan Payment on $183,000:   
$   799.00   (Interest Only Payment on 2nd)

 

Savings realized by taking a 1st & 2nd Loan 
versus the one “Jumbo” loan:     
$265.52

     The mortgage process gets more complicated the higher the financed dollars, as there is more money at risk for the Lenders.  The financing options become fewer and the cost of borrowing goes up from a rate standpoint.

When dealing in a higher-end housing market that demands higher amounts financed, it’s best to have aMortgage Lender that is well-versed regarding ALL financing options available to Borrowers … and also has access to more than one or two mortgage programs for their consideration. As you can see from my comparison above, having options offered to you for consideration can mean considerable savings.

To “Jumbo” or not to “Jumbo”!  That is the question … Because the stakes are so much higher in these transactions, it’s definitely no time to work with rookie, inexperienced mortgage lending professionals.

But again, there is more good news for those Home Buyers (or those Refinancing) seeking Chicagoland “Jumbo” loans or financing in higher amounts.  That financing and experienced mortgage lending is readily available.

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