What is a Jumbo Mortgage?
A jumbo mortgage is any mortgage that is higher than what the US defines as a conventional conforming loan. In the US, this means that any amount borrowed exceeding $417,000 US Dollars (USD) in most states is a jumbo mortgage. The amount is higher in Alaska, Hawaii, Guam and the Virgin Islands where anything above $625,500 USD is considered a jumbo mortgage. In 2008, President Bush signed a law increasing the limit of anything considered conventionally conforming to $729,750 USD. This is a temporary measure, which may expire at the end of 2008.
Generally, a jumbo mortgage is considered higher risk, because a larger amount of money borrowed may be problematic if the borrower defaults on the loan. Often in order to obtain a jumbo mortgage, you must pay a higher interest rate, and many banks now require at least 20% down, especially with the foreclosure rates from subprime loans significantly affecting lenders and the banking industry. When possible, putting enough down on a house so that the money you borrow is not in jumbo mortgage ranges is an excellent idea to save money on interest, and to avoid having to pay personal mortgage insurance (PMI).
Even so, particularly before President Bush enacted his economic stimulus package, borrowing a little over $400,000 USD didn’t seem like a lot of money to pay for a house in certain regions of the US. For some, especially in places like California or New York, the simplest of homes or even apartments can cost well above this amount. Consumers do argue that these amounts shouldn’t be considered “jumbo” amounts since nothing can be had for less than about $500,000-600,000 USD. Once the jumbo mortgage mainly applied to those who purchased luxury housing or those who purchased large areas of land, but this is clearly not the case now.
Some jumbo loans of the past were given at subprime rates, and some were offered in areas where housing prices were soaring, at zero down and with interest only options. In effect, this has created some of the problems with the current subprime mortgage crisis. People who are reaching the end of their interest only periods may be facing huge increases in payments, balloon payments, and/or loans that now significantly exceed the current value of their homes.
President Bush’s stimulus package is meant to encourage people to continue to purchase homes, but there are several takes on how effective this will be. First, some potential buyers who have the ability to take out a loan are waiting to see if home rates drop further. Second, banks are subjecting borrowers to much higher levels of scrutiny, and anyone without a significant down payment and impeccable credit is unlikely to be able to take out any loan, let alone a jumbo mortgage.
@Cafe41 -I think that there are not too many banks that are willing to take a chance on offering a jumbo mortgage for a borrower with less than ideal credit and without a hefty down payment.
There are so many hidden expenses with buying a home that you have to be able to comfortably make your mortgage payment and if you put down less than 20% you will be subjected to private mortgage insurance which is an additional monthly expense added to your mortgage payment that does not go away until you have 20% equity in your home.
@Latte31 -I know that you mean. I tried to buy a short sale property and it took so long that I lost interest in the property. The problem with a lot of these short sales involves the fact that many of these properties were purchased with no money down and have two mortgages on the property.
Since the first mortgage takes priority, you also have to get permission from the bank holding the mortgage in the second position which takes twice as much time.
For the property that I wanted to buy, the bank wanted an additional $70,000 above the asking price which I thought was unreasonable and the seller did not have any money so I walked away from the deal.
I think that with respect to jumbo mortgages, I think that it is important to be able to have the 20% down payment before you consider buying a property because there are so many things that can happen in this market and a 20% down payment gives you the best chance at being able to make the payments than if you buy with less money down.
@SauteePan -I know what you mean. A lot of these people cannot refinance the mortgage rates because they have no equity in the property. Some have tried to get loan modifications from their banks but most have been unsuccessful.
I think that the only other alternative to get rid of a home like this is to have a short sale that is approved by the bank. The approved short sale allows the borrower to sell their home at current market value which is considerably less than what their mortgage balance is.
It really takes a long time to get a short sale approved and many don’t go through in time and the home goes into foreclosure. I think that I would be too stressed out having a jumbo home mortgage on top of the fact that my mortgage was underwater.
I think that while purchasing a home with no money down or on an interest only mortgage may have sounded like a good idea a while ago, it has proven to be disastrous because of the negative amortization that many homeowners are feeling because they owe more than their house is worth along with the resetting of some of these mortgages.
Interest only loans offers a minimal mortgage payment because it is based on interest only and nothing goes toward the principle. However, these adjustable rate mortgages offer a very low interest rate for a specific term which is usually the first year of the mortgage and then it resets on a schedule of three to six months or so and then the interest rates begin to rise.
This is what happened to a lot of people and their mortgage payments are now double what their initial mortgage payment was and they are unable to make those payments and going into foreclosure.
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