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.