A jumbo mortgage loan is any mortgage that exceeds the loan ceiling established by the two federal agencies that purchase most mortgages from lending institutions: Freddie Mac and Fannie Mae. These quasi-private institutions purchase ninety percent of all mortgages that are granted in this country. Those purchases allow the lenders to turn around an make another loan by maintaining cash in their coffers. Freddie Mac and Fannie Mae then package these loans and sell them on the securities markets to investors. The maximum amount on their acceptable loans changes annually based on changes in the housing market; currently it is $417,000 except for Hawaii, Alaska and Guam where it is $625,000.
Any mortgage over $417,000 in the “lower 48” is called a non-conforming loan and must be issued without the insurance of a repurchase by one of the two agencies. These larger loans are known as “jumbo mortgages.” The fact that the loan ceiling for conventional loans remained unchanged from 2018 to 2020 is another indicator of the cooling housing market. Nevertheless, there are many segments of the American housing market where $417,000 is well below the median housing price – even with a 10% or 15 % down payment thrown in.
Accordingly, jumbo mortgages became much more common in the hotter housing markets over the last five years. Generally, these mortgages require a minimum of 5% down and will have an interest rate that is a quarter to one half percent higher than a comparable conventional loan. Because of the size of the loan, mortgage insurance is often an issue as few buyers can afford a 20% down payment on a home with, for example, a half million dollar mortgage.
80/20 piggyback loans have been one way that jumbo mortgages have been incorporated with smaller loans to make the 20% down and avoid the mortgage insurance. Mortgage insurance is calculated by the size of the loan, and personal mortgage insurance (PMI) can be very costly. PMI is required by all lenders until the borrower has holds twenty percent of the home’s value in equity; that’s a long way from a 5% down payment on a home that requires a jumbo loan. Some jumbo mortgage loans amortize over forty or even fifty years, in order to make the monthly payments manageable.
For people that take on a jumbo mortgage loan with an adjustable rate, the cost of refinancing the loan when the insurance rate adjusts will be costly. Some banks will rearrange the terms of the loan so that the borrower can avoid the refinancing costs.