How does Jumbo mortgage work

Published: 25th April 2008
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A Jumbo Mortgage is a mortgage with a loan amount above conventional loan limits. Jumbo mortgages are used to purchase high-priced homes that require larger than normal loans.
A jumbo mortgage is nearly always considered a non-conforming loan because it exceeds the loan limit set by Fannie Mae and Freddie Mac in USA. These are the two publicly chartered corporations that buy mortgage loans from lenders. They do this to make sure that mortgage loan money is available at all times around the nation.
You should know that the single-family limit benchmark changes yearly and if you need to borrow more than that amount, you will need a jumbo mortgage. A jumbo loan like in case of bad credit mortgage usually has a higher interest rate than traditional loans.
The advantage of a jumbo mortgage is it allows you to buy a more expensive house. The disadvantage is that you will normally pay a higher interest rate. While they're convenient, they also charge slightly higher interest rates. Since the dollar amount that defines a jumbo mortgage is redefined each year, it's subject to change.
Recently, the national mortgage crisis has spread beyond the sub-prime and bad credit mortgage market to jumbo loans. This serious crack in the underpinnings of the mortgage industry threatens to stall home sales in housing market area, starting a chain reaction that eventually could impede sales all the way down to entry-level buyers.
Jumbo mortgage loans are a higher risk for lenders. This is because if a jumbo mortgage loan defaults, it is harder to sell a luxury residence quickly for full price. Luxury prices are more vulnerable to market highs and lows. That is one reason lenders prefer to have a higher down payment from jumbo loan seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan.
Very popular option for jumbo mortgage is a 30 year fixed jumbo mortgage and fixed bad credit mortgages which are preferable for people who plan to own the home a long time. With this type of mortgage, the rate will not go up but it will never go down, either - it stays the same for the life of the loan. This is good because the payment is predictable, and cannot rise sharply if interest rates do. On the other hand, the 30 year fixed jumbo mortgage rate is higher because the lender knows they can never get more than the original rate.
Since jumbo mortgages are higher loan amounts, there is more to lose. Both the size, together with other factors, result in a higher rate over those granted for conforming loans. Buyers should shop around and compare all mortgage and bad credit mortgage products for finding a good lender when applying for a jumbo mortgage loan in order to find the best rate. In truth, jumbo mortgage interest rates are only one thing to consider when shopping for a jumbo mortgage. There are closing costs and fees to consider that might even out the difference in rates. It's possible the company with higher jumbo mortgage rates may turn out to be the best deal in the end.


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