Jumbo Loans: Are They Worth The Rate?

Jumbo Loans: Are They Worth The Rate?

A jumbo mortgage is a loan for an amount that exceeds certain definitions for standard loans. The exact numbers are set by the two largest secondary market lenders, Fannie Mae and Freddie Mac, and change every year.

These loans are considered high-risk due to the large loan amount, so the interest rates are usually higher than those on conventional mortgages, typically by 0.25% to 0.5%. Most lenders offer a choice of fixed-rate, adjustable-rate and interest-only repayment plans. They were once generally associated with luxury homes, but rising real estate prices made jumbo loans popular and nearly commonplace. Nevertheless, some serious questions need to be answered before a borrower decides he’s ready to take a jumbo loan.

Most importantly, do you have to borrow this much money? Jumbo loans are usually applied toward buying a house, but certainly there are other ways the money can be spent. It is important, however, to consider the implications of the action and look for other opportunities to make the purchase without borrowing this much. If you can find other ways to finance the purchase that will allow you to take a smaller loan, it may be wise to use them, because repaying large loan amounts involves additional difficulties.

The monthly payments. Typically they will amount to as much as several thousand dollars, so will you be able to afford them and will your income be sufficient to maintain these payments in the future? Do you expect your salary to increase or a recurring expense, like tuition or medication bills to be waived soon? If this is so, you will easily maintain the level of available cash in the household.

It’s not just the monthly payment. When you’ve bought your house, you’ll have to pay your insurance, property taxes, and all the maintenance bills. That diminishes your spending money even more. It’s best to consult a specialist regarding the particular property’s bills and taxes to know what to expect.

Imagine the life. OK, you’ve moved in, you’re finally in your dream house but, after that huge monthly payment is subtracted from your budget, will your family be able to afford any entertainment and emergency spending if needed? The income will be required to cover the monthly payment, all property costs, and all the living expenses, so work out the numbers.

Do you really need the new house? Is the home you’re going to buy really worth it and are you and your family going to be able to take advantage of all of its features? Is it appropriate for you? Are you trying to impress anyone with this purchase or does your family really need a big property? A house may turn out to be just too big and require a lot of cleaning and maintaining for space you simply don’t use.

Those are a lot of questions, but we're talking about a lot of money. Take your time to think and make a decision that you won't come to regret somewhere down the road.