A jumbo loan is, as it’s name suggests, a loan that has an amount over other conventional conforming loan limits. The loan limit in the majority of the U.S. is $417,000, the exceptions being Alaska, Hawaii, Guam, the U.S. Virgin Islands , and some areas of California, where the limit is $625,500. Jumbo loans are used to help purchase houses where these limits are not high enough. However, jumbo loans have a more wide-spread use in today’s society but also come with a significant risk and requirements.

Usually, a jumbo loan is used to purchase a luxury home. Luxury prices are more susceptible to market value highs and lows and fluctuate often. Recently however, jumbo loans are now often used to purchase more modest homes in big city areas, due to economic strains.

Jumbo loans provide a significant risk to lenders. Because luxury homes and many big city homes are usually difficult to sell, if the loan were to default then they would have to deal with the hardships of having to sell these homes. Lenders protect themselves by having a higher down payment and often require two appraisals for jumbo loans.

The interest rate on jumbo loans are higher than traditional loans. This is done to defend the lender who has to deal with the higher risk of jumbo loans. The difference between rates varies due to the current market price of risk. It is often expensive (and difficult) to refinance a jumbo loan due to the closing costs. However, some lenders offer a service of extension and consolidation agreement, so that a jumbo loan lender will not have to pay for mortgage tax once more on the same principal balance. In other instances, title insurance companies will offer up to a fifty percent discount, this is usually required by law for those who will be refinancing within 1 to 10 years. The largest discount offered for jumbo loans is for refinancing within a year.

While they began as a way to help in the purchase of luxury homes, jumbo loans have become more common and therefore more important. Many lenders are still willing to do jumbo loans with out too much hassle despite the risk they impose. So, if you feel that you need a jumbo loan, prepare for what is in store, and make sure you discuss all of your concerns with your mortgage lender.

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