Most homebuyers research the different types of mortgage prior to buying. There are several options for these loans. There are several options for these loans. One decision home buyers need to make is whether to get a conforming loan or a jumbo loan.
Conforming loans are those that the government-sponsored agencies Freddie Mac and Fannie Mae are willing to buy from lenders. These two entities announce the maximum size of a loan they will accept each year. For many years, that amount has been $417,000 in most of the country’s counties, though it is higher in some areas with more expensive homes. Fannie Mae and Freddie Mac recently announced this limit would not change for most counties in 2016, according to HousingWire.
A jumbo loan, on the other hand, is a loan that is not conforming. These loans are greater than the largest loans the two agencies will buy. They are typically used to purchase more expensive properties and the process to acquire one may have additional requirements. Similar to conventional mortgages, your lender will consider the following items for approval: proof of income, your debt-to-income ratio, your credit score and down payment.
Big benefits of jumbo loans
There are several perks to jumbo loans. A big one is that they have surprisingly lower interest rates when compared to conforming loans. According to Credit Writedowns, this is because conforming loans are dependent on agency mortgage-backed-securities yields. In the past few years, these yields have increased and, therefore, so have the interest rates of conforming mortgages.
“Banks use jumbo loans to draw in more customers.”
Jumbo loans are generally associated with banks, rather than government agencies, and don’t need to comply with market standards. If banks feel they can remain profitable while lowering rates, they are likely to do so to attract borrowers. Lowering rates on jumbo loans can be a good strategy to win over new customers. For several years, the result has been that jumbo loans’ interest rates have remained lower than conforming ones.
The Wall Street Journal reported this began in 2013. At first, industry experts were shocked to see interest rates on jumbo loans fall below those of conforming rates. However, several years later, this trend continues. According to 24/7 Wall St., the most recent rate for a conforming loan remained unchanged at 4.14 percent while jumbo loans fell by 0.01 percentage point to 4.01 percent.
For those who are considering purchasing new property, a jumbo loan is worth considering. While the loan will be worth more money, borrowers may pay less in interest payments over time.