Jumbo Mortgage vs. Regular Mortgage: What’s Better?
If you are looking at a house you like, well aware you don’t have the liquid assets to buy it in cash, don’t give up yet. There is a chance you can apply for a mortgage – a loan that can be available through a government or a private entity. Loans available through a private entity, such as mortgage agencies, banks, or credit unions are called conventional or regular mortgages.
Conventional mortgages have fixed rates of interest, they last up to 30 years, and the requirements are much stricter for a house-buyer. If you are interested in taking out a regular mortgage you should know that they usually have a cap on the value of the loan and since January 1st of 2022 that value is just under $650k in most of the continental USA.
However, there are mortgages without the loan limit set by the Federal Housing Finance Agency that are available to certain home buyers, and that is a jumbo mortgage.
First Things First: What Is Jumbo Mortgage?
To put it simply: Jumbo mortgages’ use is to fund luxury properties and homes in areas that have competitive prices. It is available to people that have a better credit score (700 and above) and a lower debt to income ratio (between 36% and 43%) than an average home-buyer. It does not have a set cap on value, but the lowest possible loan is established, although it varies from state to state.
You cannot take out a jumbo mortgage for just any house or property, and there are more credit risks since it is not secured by any government-sponsored enterprise. If you are not sure whether it is the right fit for you, you should contact a mortgage agency, such as LBC Mortgage, and they can provide you with a service of analyzing your financial ability.
As they effectively are some sort of a conventional mortgage, jumbo’s rate of interest is fixed for 30 years, but those rates can be higher than the rates of regular mortgages. This happens because government-sponsored enterprises (eg. Fannie Mae and Freddie Mac) cannot handle that amount of value, and the mortgage is left unsecuritized, ergo becomes a higher risk for the loaner.
Who Is Henry?
If after the analysis of your financial ability, you are estimated to be a good candidate for a jumbo loan, this means that you are a HENRY – High Earner, Not Rich Yet. HENRY is the acronym representing a perfect borrower for the jumbo mortgage.
You have an annual income between 250k and half a million USD, an established credit history, and retirement accounts, but don’t have much in assets and savings. Most HENRYs are millennials, although it is not a generational segment, and most of them do have big student loans.
What About a Regular Mortgage?
When talking about conventional mortgages, there should be a distinction between conforming and non-conforming loans. A jumbo loan is a non-conforming one, because of its values that exceed the Federal Housing Finance Agency’s limit.
So, if you search for a house for less than $647,200, if you are a regular home-buyer, with an average credit score and annual salary, you should be looking into regular conforming loans. They still require a somewhat higher credit score than the loans provided by some federal entities, but the down payment is smaller and the property standards can be more liberal.
The value of conforming loans is limited by the FHFA and it changes every year, to keep up with housing prices in the US. That limit varies from state to state, and even from county to county, depending on the pricing in a particular area.
As this loan is securitized by Fannie Mae and Freddie Mac, the requirements are less strict and the interest rates are usually lower. It is less risky for banks and mortgage agencies to lend you the loan because they will most likely sell it to some government enterprise that will then repackage and resell it as another one.
The Main Differences: Jumbo vs Regular
Let’s cut to the chase: In the contest of jumbo vs regular mortgage, the loan that wins is the one that best fits your financial situation and the value of your dream house. If you want to buy a house that exceeds your liquid means, but you have the credit score and low DTI ratio to back you up, and you are earning enough to pay the additional risk fees – consider the jumbo mortgage. In any other case – the regular mortgage is optimal.
Both jumbo and regular mortgages are types of financing that are lent by private lenders. Private lenders are more rigorous when deciding if you are a right fit and the better your finances are, the more money you can borrow with lower interest rates.
Rates are defined by the Federal Reserve benchmarks and your economic condition, but if you take on a loan for 15 or 30 years, you can get a fixed rate on both jumbo and regular mortgage. Jumbo rates are usually higher and the down-payment is 10-20% bigger than with nonconforming loans.
These differences exist to cover the risk involved with jumbos because they are not secured by federally backed home mortgage companies. When you apply for a mortgage you need to submit homeownership expenses, up to 6 months for regular, and up to 12 months for the jumbo loan.
Your income ratio has to be between 36% and 45%, although if you are applying for jumbo it should be in the lower percentiles of that range. The main difference is the risk that arises out of the high amount of money you are borrowing with jumbo, and the inability of a lender to sell that loan to federal entities.
Consider This, Too…
There is an effective way to lower your monthly payment, for both regular and jumbo mortgage, and that is buying mortgage points. Each discount point equates to 1% of your total loan amount. That way, if you have liquid assets, you can reduce your rate and save thousands of dollars in interest.
Any mortgage can benefit any buyer, so do your research, calculate your needs and risks to make the best decision. If you don’t have a specific house in mind and your lender estimates that you can be a jumbo borrower, still consider other prospects and find the option that will ultimately fit best with your lifestyle, plans, and goals.
Jumbo Mortgage vs. Regular Mortgage: What’s Better?