What Is a Jumbo Loan?
In many respects, a jumbo loan is similar to a traditional loan, but larger in the sheer size of the dollar value attached to it. The line of demarcation at which a traditional --- sometimes called conventional --- loan becomes a jumbo loan is set by government-backed mortgage brokers Fannie Mae and Freddie Mac. Traditional loan limits can and do fluctuate routinely in response to current economic conditions.
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Background
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Fannie Mae and Freddie Mac classify some loans as jumbo because these two agencies purchase the bulk of residential and commercial loans written by private lenders in this country. The purpose of this is to free up capital in the private financial sector to make even more loans and keep the economy healthy. However, Fannie and Freddie officials realized that they couldn't offer a $100,000 loan with the same terms as a $1 million dollar loan --- the risk levels were too disparate. Thus was born the concept of the jumbo loan.
Limits
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As of the end of 2010, any loan amount in excess of $417,000 is officially classified as a jumbo loan, except in the states of Alaska, Hawaii and the territory of the Virgin Islands, where the higher cost of living pushes the limit up to $625,500. Mortgage loans that exceed these numbers are normally accompanied with higher interest rates and costs than a conventional loan.
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Interest Rates
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When it comes to making loans for residential or commercial purposes, in the eyes of the lender, it all comes down to the numbers. Types of loans that have proven themselves over the long term to be more costly due to a higher default percentage will incur a higher interest rate for the borrower. This is the only real strategy a lender has to protect itself, short of getting much more strict about lending guidelines, which lenders have also done.
Costs
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The problem with a high-dollar loan is not only in the increased rate of default but in the type of properties involved, normally luxury homes that typically do not sell quickly and might sit on the market for years while the bank watches the price drop incrementally. Another cost sometimes overlooked rears its ugly head when it comes time to refinance. This is the cost of closing the new loan and, as might be expected, it is much higher on the basis of a higher-dollar loan. The end result is that a borrower finds it more difficult to refinance a jumbo loan, and possibly falls behind on payments, and forcing the lender to seek remedy through foreclosure.
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