Not all jumbo loans are the same, so doing your homework before signing on the dotted line is important. Unlike a conventional mortgage, a jumbo loan allows you to borrow more money, making it essential for high-value real estate purchases.
Jumbo loans can come with varying terms and interest rates. Let’s explore your options to help you decide which jumbo loan might be right for you.
What is a jumbo loan?
A jumbo loan is a type of mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA).
These loans are typically used for high-value properties and come with specific requirements:
- Eligibility: Jumbo loans are not eligible for purchase by Fannie Mae or Freddie Mac.
- Credit score: They require a higher credit score compared to conforming loans.
- Down payment: Lenders usually ask for a larger down payment — often 20% or more.
- Interest rates: Jumbo loans have higher interest rates due to the increased risk for lenders.
- Debt-to-income ratio: Borrowers must meet stricter debt-to-income ratio standards to qualify.
How to find the best jumbo loan
To find the best jumbo loan for you, you should compare multiple factors to ensure you get the most favorable terms.
Here are key elements to consider:
Interest rates
Interest rates are a major factor in the overall cost of your jumbo loan. Because lenders view jumbo loans as riskier, these loans often come with higher rates. Comparing rates across different lenders can help you secure the best deal. Decide which of these options works best for your jumbo loan needs:
- Fixed vs. adjustable rates: Consider whether you need a rate that starts lower and increases over time or a fixed rate for the life of your loan.
- APR comparison: The annual percentage rate (APR) is the yearly interest added to a loan or borrowed amount. Check multiple lenders’ APR, including fees.
- Rate-lock: A mortgage rate lock enables you to secure a specific interest rate on a mortgage for a set period based on the current market rate. Ask if lenders offer rate-lock options to secure a good rate.
By comparing rates, you’ll position yourself to save money in the long run.
Loan terms
The loan term you choose affects both your monthly payment and how much interest you pay over time.
For example:
- Interest rates: A 15-year loan typically has lower interest rates than a 30-year loan.
- Affordability: Longer terms make payments more manageable but cost more in interest in the long run.
- Financial goals: What else do you plan to do after the home is purchased?
Choosing the right loan term is a balancing act between affordability and long-term savings.
Down payment requirements
Jumbo loans typically require a higher down payment than conventional loans, often 20% or more.
A larger down payment can help you lower your loan amount, secure a better interest rate, reduce your monthly payments, and save on interest over time.
Consider the trade-offs between upfront costs and potential long-term savings.
Fees and closing costs
Jumbo loans often come with higher fees and closing costs than other loans. These can include everything from application fees to appraisal costs. Getting a detailed estimate upfront ensures you understand the total cost of the loan.
The cost will consist of:
- Loan estimate: After submitting your application, your lender will provide a loan estimate with a breakdown of costs.
- Hidden fees: Look for hidden costs in the fine print and clarify with your lender what they’re for.
- Discounts: Check if the lender offers discounts on fees or closing costs or if you can roll them into the mortgage.
By carefully reviewing the fees and closing costs, you can avoid surprises and ensure that the total cost of the loan aligns with your budget.
Lender reputation
Working with a reputable lender is key to a smooth jumbo loan process. A good lender offers competitive rates and excellent customer service.
Choosing a reputable lender can make the loan process smoother and give you peace of mind, knowing you’re in good hands.
Other considerations
- Do you need flexibility with your loan terms? Some jumbo loans offer flexible terms like interest-only payments for the first few years. If you expect changes in your income or want flexibility in how you repay, look for loan options that offer more control.
- What is your long-term financial plan? Consider how this jumbo loan fits into your broader financial goals, like saving for retirement or other major investments. Your loan must align with your plans without limiting your ability to save.
- How does your credit score affect your loan options? Your credit score plays a significant role in the interest rates and loan terms you’re offered. Check with different lenders to see how your credit affects your options and try to negotiate better terms.
- What type of property are you buying? Lenders may have different requirements depending on whether you’re buying a single-family home or a multi-unit property. Make sure the lender you choose understands your property type and can offer the right loan for your situation.
What does ‘best’ mean to you?
Whether you prioritize a low interest rate, minimal fees, or a flexible loan term, there’s a jumbo loan choice for you. By carefully evaluating your options, you can select a jumbo loan that aligns with your financial goals and provides long-term value.