The Pros and Cons of Jumbo Mortgage Loans
As NerdWallet explains, a jumbo loan is a home loan that exceeds the limit set for conforming loans by the Federal Housing Finance Agency. Nonconforming loans can’t be sold to Fannie Mae or Freddie Mac, so they’re riskier for lenders. Is this type of home loan right for you? Exploring the pros and cons of jumbo mortgage loans can help you make that determination.
The Pros of a Jumbo Mortgage
Because extending a jumbo mortgage is riskier, borrowers seeking them will often need to work a bit harder. Will the advantages be worth it? As Mint explains, this form of financing does come with several pros:
- The Larger Amount: When you want to borrow a larger amount of money in a single home loan, a jumbo loan offers a way to do just that while avoiding the restrictions imposed by government-sponsored enterprises like Fannie Mae and Freddie Mac.
- The Potential for Investment: It can also provide you with a chance to make an investment by purchasing a home, which has the potential to be a significant long-term asset.
- Flexibility. Jumbo loans can be used to purchase a primary residence, vacation home, or investment property.
- Loan Options: Jumbo loans come in a wide array of shapes and sizes. You will likely find both fixed-rate and adjustable-rate selections, and numerous loan terms to choose from.
The Cons of a Jumbo Mortgage
Before deciding a jumbo mortgage is the best course forward, it’s important that you consider its drawbacks. As Consumer Affairs notes, these supersized home loans do come with some disadvantages:
- Tougher Approvals: Jumbo loans come with rigorous qualifying requirements and stricter guidelines, so the approval process is tougher.
- Higher Costs: Jumbo loans generally bring higher costs. You’ll not only have a higher loan amount but also a higher interest rate. You may also have private mortgage insurance.
- Harder Sales: While you may not be planning to sell your new home anytime soon, you might want to consider that homes that require jumbo loans to purchase can be harder to sell. If you need to sell, it may be more difficult to find a buyer.
- Reduced Tax Benefits: Mortgage interest deductions are capped at $750,000, so homeowners with larger mortgages may not be able to deduct the full amount that they pay in interest.
Qualifying for a Jumbo Mortgage
While the specifics will vary from lender to lender, there are certain things that generally remain consistent. Forbes indicates what borrowers trying to qualify for a jumbo loan can expect:
- Down Payment: Lenders prefer a down payment of at least 15 percent.
- Debt-to-Income Ratio: A DTI of 36 percent or lower is preferred.
- Assets: Some lenders will require borrowers to have a year’s worth of mortgage payments in reserve. The form of these reserves could be liquid assets like a savings or investment account or something more solid like jewelry, art, or real estate.
- Appraisal: Lenders may require a second appraisal in order to confirm the value of the property that you hope to buy.
- Interest Rate: Interest rates are often higher for jumbo loans. How much higher? It’s not uncommon for the rate to be one or two percentage points higher than on a conforming loan.