What Is the Difference between a Jumbo Mortgage and a Regular Mortgage?
September 20, 2009 by admin
Filed under Mortgage Loans
This article’s intent is to help buyers begin to understand the various differences that exist between jumbo and regular mortgages. In order to begin to make a fair evaluation between these two types, a buyer will need to understand the following:
First and foremost, under a regular mortgage loan, an applicant will not be eligible for a large amount, typically in excess of several hundred thousand. Typically, regular mortgages are intended for smaller, average sized households. Common properties are usually for buyers that do not require excessive loan amounts.
Regular mortgages are frequently governed by interest rates that are fixed, not variable. These types of mortgages are better for first time buyers, as these mortgage types are straight forward in their payment schedules. Mortgage loans with the aforementioned traits are known as fixed-rate mortgages.
A second variation on regular mortgages includes a type known as interest only fixed-rate mortgage. Under this schedule, the buyer will be responsible for paying the interest on the loan for the first half of its life. During the second part of the loan’s life, payments will be made toward the principle. Furthermore, the associated interest rate still remains similar in nature to a fixed-rate mortgage.
Be aware, under a fixed-rate mortgage, should the market interest rate begin to drop, your loan’s interest rate will remain at the fixed level that was applicable at the loan’s origination. The only method to lower your mortgage’s interest rate is through refinancing.
On the reverse side, should the market interest rate begin to rise, the interest rate on your mortgage will remain steady. This fact is particularly useful, allowing the buyer to better plan future finances. Under a fixed rate loan, the buyer will always be aware of their current interest rate and secure in the knowledge that their interest rate will never rise of its own accord.
If you expect your future home may cost more than an average house, you may wish to apply for a jumbo mortgage. A jumbo mortgage was given its name as it is intended for buyers seeking more expensive homes. The only time when a jumbo mortgage is applicable is in the event the required loan amount is in excess of standards utilized by the government backed Freddie Mac and Fannie Mae entities.
Freddie Mac (FHLMC) and Fannie Mae (FNMA) comprise the largest secondary mortgage lenders in the market. These entities operate by purchasing loans made by other institutional lenders. In the event that a single loan may exceed the specified limit, other investment entities like private banks or insurance corporations will buy the remainder of the loan.
Due to its size, the associated interest rate will be significantly higher than that of a regular mortgage. This is because there is more associated risk with jumbo mortgages due to their sheer size. Jumbo mortgage interest rates are determined by the loan size and expected property taxes on the home. These two factors may significantly hike the associated interest rate.
In the event the required amount for the loan is in excess of $650,000, the jumbo mortgage then becomes known as a super jumbo mortgage. Typically, this mortgage is only used for homes that cost in the millions.
In summation, regular mortgages are applicable to the majority of home owners, and to those seeking fixed interest rates that result in a set payment schedule for the mortgage’s life. Regular mortgages are typically used for the common house or property. This type is excellent for those purchasing their first home.
Jumbo loans are applicable for property amounts between $400,000 to $600,000. The associated interest rates of these mortgages are comprised of the loan amount and expected taxes on the property. Lastly, there is more risk to a jumbo loan due to its sheer size.
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