Jumbo Mortgage
There are different price levels of houses in US particularly, when prices rose to higher level. Base on price grid, we can categorize into two types as low price houses and luxury houses. In mortgage loan industry, we also defined it in the same way, that traditional mortgages for lower price houses and Jumbo Mortgages for luxury houses.
In US, there are two main govt. sponsored mortgage agencies Fannie Mae and Freddie Mac that purchase the residential mortgages from commercial lenders and banks and resell them to big investors. Jumbo mortgage is one that couldn’t cover by the limited set by Fannie Mac (FNMA) and Freddie Mac (FHLMC). It help lenders to disburse more mortgage loans and fulfill the need of clients. Currently Jumbo mortgage loan limit is $417,000 where as in some states like Hawaii, the Jumbo Mortgage limit is $625,500. This is because; house prices in these states are very expensive. Jumbo mortgage limit for double family property is $ 533,850 and for triple family property, the set limit is $645,300. It moves above as the family sized increases and these are called Super Jumbo Mortgage.
Jumbo mortgages come with higher interest rates and closing costs. The logical reason behind this higher rate and cost is that the FNMA and FHLMC both resell the residential mortgages to investors and in Jumbo Mortgages are not easy to sell in this market. To mitigate the risk, FNMA and FHLMC both charges higher rate. Ultimately this change affects the final consumer because the borrower will pay the interest amount.
Characteristics of Jumbo Mortgage
Jumbo Mortgage is encumbrance with various characteristics like;
ü Higher Cost: Jumbo mortgages associated with higher cost because the prices of these houses are very expensive. Mortgage tax amount and closing process cost also make it more expensive as compare to traditional mortgages.
ü Interest Rate: Jumbo mortgage is always offered with higher interest rate, because it embedded with higher risk. Lenders know that if clients default the payments then it would be hard for them to sell the property quickly as there are limited clients for luxury houses. To ensure profit from this, lenders charge higher rate of interest, approximately around 1.50 points more interest than traditional mortgage.
ü Foreclosure Risk: Jumbo mortgages have more significant chances to convert into a foreclosure than a traditional mortgage. This is because; the security is luxury and not easy to sell promptly and due to higher cost, clients didn’t bother about refinance. At present, almost 1 of every 10 jumbo mortgage is facing problems of delay payments.
ü Packaged Loan: Jumbo mortgage is packaged loan for those clients who are really interested in applying for. Packaged loan means, clients can satisfied their need in single mortgage otherwise, they will have to adopt different ways to manage funds.
ü Types of Interest Rates: Like other traditional mortgages, Jumbo mortgage is also offered in Fixed rate and Adjustable rate. This helped lot clients in choosing the best option for their jumbo mortgage. Usually clients of Jumbo mortgage go for higher loan tenor like 30 years and 40 years. Selecting the right rate will helped them in saving huge amount of mark up.
ü Refinance: Jumbo Mortgage is not referred by refinance due to higher cost of closing process. Clients of Jumbo mortgage usually go for consolidation that helped them in saving the cost.
Nightmare: In the end of year 2007, when property prices fell sharply, many lenders stopped offering Jumbo mortgage loans to borrowers and this led to increase in demand for Jumbo mortgage. But higher rate of delinquency in Jumbo mortgage, restricted lenders to cater the need. At present, US market; specially mortgage market is suffering with foreclosures and causes high losses to banks and FIs. The tendency of jumbo mortgage foreclosure is also showing rapid increase that is a alarm for lenders. As we discussed earlier, it is not easy for client to sell this jumbo mortgage to market due to high property price & interest rate. Thus jumbo mortgage is becoming nightmare for lenders.
How to Avoid Jumbo Mortgage: It is fact that clients are looking the ways where they can avoid falling in Jumbo Mortgage category (Needless to mention the repeated causes).Here is solution, Many lenders offering two mortgage loans at a same time. The first loan amount will be higher accompanied by lower interest rate and other will be small loan embedded with higher rate of interest. The second loan can be offset by adjusting sooner or later and thus it can help clients in saving huge amount of mark up.
