What Is A Jumbo Mortgage?
Fannie Mae and Freddie Mac, federally backed home mortgage companies, are restricted by law to purchasing single-family mortgages with origination balances below a certain amount, known as the conforming loan limit.
The conforming loan limit for 2021 is $548,250 and up to $822,375 or more in some high-cost areas. Anything above the conforming limit is known as a jumbo loan.
Jumbo loans are not backed by Fannie Mae, Freddie Mac or the federal government, which means the lender is not protected from loss if the borrower should default on the loan. Because jumbo loans are larger than the average mortgage and carry more risk, lenders have stricter requirements compared to traditional mortgage loans.
The requirements to refinance a jumbo mortgage
If you’re considering refinancing your jumbo loan to get lower loan rates, you need to meet your lender’s minimum requirements. Here is what a typical lender may require to qualify for a jumbo loan refinance:
- A minimum FICO credit score of 660 but preferably 700 or higher
- A maximum debt-to-income (DTI) ratio of 43%
- A maximum loan-to-value ratio (LTV) of 80%
- No more than four mortgage properties
- Your name on the title of your home for at least six months
- No bankruptcies within the past seven years
- Proof of cash reserves to show that you have enough saved to cover the loan’s principal, interest, taxes and insurance for at least several months
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Here are documents you’ll be required to provide for a jumbo loan refinance:
- Two years of tax returns
- Two years of W2 forms
- Recent paystubs
- Bank statements
If you’re self-employed, you may need to provide a profit and loss statement and a balance sheet. Don’t forget about closing costs which could be between 2% to 5% of the total loan balance; however, closing costs vary by lender.
Interested in a mortgage refinance? Visit Credible to get in touch with a loan expert to have your mortgage questions answered.
Refinance rates over the past year
By January 2020, the average mortgage interest rate for a 30-year fixed loan had an annual percentage of about 3.7%. The Federal Reserve took action in response to COVID-19, slashing interest rates to encourage borrowing on home loans.
By the first week of January 2021, a 30-year fixed loan was at an all-time low of 2.65%. Since then, interest rates have fluctuated and started to increase in mid-February. However, rates have been dipping again recently. Rates have remained under 3% for last three consecutive weeks.
Mortgage refinance rates are still near historic lows. Here’s a look at today’s mortgage rates:
- 30-year fixed-rate mortgage refinance: 2.875%
- 20-year fixed-rate mortgage refinance: 2.75%
- 15-year fixed-rate mortgage refinance: 2.25%
- 10-year fixed-rate mortgage refinance: 2.125%
If you’re interested in seeing your personalized mortgage interest rate, visit Credible to compare rates across multiple lenders without affecting your credit score.
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A normal refinance vs a jumbo loan refinance
Homeowners typically decide to refinance their home to gain the following loan options:
- Negotiate a loan with lower monthly payments or a lower interest rate
- Shorten the loan term
- Change the loan type from an adjustable-rate mortgage to a fixed-rate mortgage
- Cash-out refinance to draw out the home’s equity and make home repairs, renovations or use for debt consolidation
While a normal refinance and a jumbo loan refinance are for the same purpose and have the same potential benefits, they have different requirements.
Here is what your lender may require with a normal refinance:
- A credit score of 620 or higher for conventional mortgages; however, some government programs have a minimum as low as 500
- A DTI ratio of 43% or lower
- An LTV of 80% or lower
While they’re similar, requirements vary by lender. Refinance rates for jumbo loans also don’t vary much compared to normal mortgage refinances. Make sure to shop multiple mortgage options to get the best rate. Even a slightly lower mortgage rate can make a big difference over the life of the jumbo loan.
You can visit an online marketplace like Credible to view refinance rates and get cash out to use for debt consolidation.
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3 Pitfalls of Taking Out a Jumbo Mortgage
Most people who buy a home need a mortgage to pay it off over time. But what if you’re buying a more expensive property? If that’s the case, you may need to apply for a jumbo mortgage.
A jumbo mortgage doesn’t just mean a large mortgage. There are specific borrowing limits that dictate whether your mortgage falls into the conforming loan category or jumbo category.
Those limits change every year, but in 2021, the conforming loan limit for a single-family home is $548,250. That said, in some parts of the country, the limit is $822,375. Those areas include Hawaii and Alaska, where property prices tend to be higher.
A jumbo loan could be your ticket to the property of your dreams. But be aware of these drawbacks.
1. You’ll generally get stuck with a higher interest rate
There’s a reason borrowers with high credit scores are rewarded with competitive mortgage rates. Because there’s less risk to lenders, borrowers get to reap some savings.
Jumbo mortgages are, however, more risky than conforming loans by nature, since they involve larger sums of money. As such, jumbo lenders expect to be rewarded for taking on that risk via higher interest rates.
As of this writing, the average interest rate for a 30-year fixed mortgage is 3.164%. Jumbo mortgage rates, on the other hand, are 3.23%.
That may seem like a small difference. But if you were to borrow $700,000 at 3.16%, your monthly payments would be $3,015 for principal and interest, and you’d spend a total of $385,411 on interest in the course of paying off your home. At 3.23%, your monthly payment goes up to $3,038, and your total interest increases to $393,679.
Of course, you can argue that an extra $8,268 in interest over 30 years is worth it for getting to borrow more. But that assumes a modest difference in interest rate. Depending on where you live and what your credit score looks like, the difference between a conforming loan and a jumbo loan may be greater from an interest rate perspective.
2. You’ll have to make a larger down payment
When you take out a conventional mortgage, you can sometimes get away with making less than a 20% down payment. Not with a jumbo loan, though. Jumbo lenders will almost always want a 20% down payment at a minimum, which means you’ll not only have to save more money ahead of buying your home, but also, tie up more cash in that home from the start.
3. You could face higher closing costs
When you take out a mortgage, you pay a series of fees to finalize that loan known as closing costs. Closing costs are generally calculated as a percentage of your loan amount, so the more you borrow, the more you’ll pay.
But some jumbo lenders may also impose higher fees because, frankly, they can. There’s a more limited market for jumbo loans than conventional loans, so mortgage lenders don’t have to work as hard to be competitive. As such, a jumbo lender might stick you with a higher application fee than you’d pay for a conforming loan, which could, in turn, drive up your total closing costs.
A jumbo mortgage may be necessary if you’re buying a more expensive home, and it’s not necessarily something to worry about or be afraid of if you can afford it. Just be aware of these pitfalls before you apply.
Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.
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Jumbo mortgages were easier to get in July
Mortgage credit availability increased marginally in July following a big downturn in June, according to a report released by the the Mortgage Bankers Association on Thursday.
The MBA Mortgage Credit Availability Index overall rose by 0.3% to 119.1 in July (the index benchmarks to 100 in March 2012; a higher number portends more mortgage credit availability). The Conventional MCAI increased 0.8%, while the Government MCAI was unchanged.
Mortgage credit availability largely jumped on the strength of jumbo mortgages. Of the component indices of the conventional MCAI, the jumbo MCAI increased by 3.8% and the conforming MCAI fell by 3.2%, the MBA reported.
“Credit availability slightly increased in July, driven by an increase in jumbo loan programs,” said Joel Kan, the MBA’s associated vice president of economic and industry forecasting. “The overall gain was despite another month of pullbacks in high-LTV refinance programs due to GSE policy changes.”
According to Kan, the elimination of more high-LTV refinance loans drove most of the 3% drop in the conforming index. Lenders adding new refinance loans that target qualified, lower-income Fannie and Freddie borrowers canceled the drop in conforming mortgage credit availability.
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June of 2021 saw a pullback in jumbo ARM offerings from investors, but they spiked in July. That led to an uptick in cash-out refis and investment homes, according to Kan.
“Even as the economic recovery is underway, overall credit supply has remained close to its lowest levels since 2014,” Kan said. “Some borrowers are still in pandemic-related forbearance status, and servicers continue to work through possible resolutions for these borrowers.”
Mortgage credit availability dipped 8.5% in June to 118.8. It was the lowest MCAI level since September 2020, and followed more than six months of increasing credit supply.
Mortgage applications in the week ending Aug. 6 rose 2.8% after a strong jobs report in July. The U.S. Labor Department announced 943,000 new jobs, exceeding the forecast of 865,000. It was the highest month-to-month growth since August 2020.