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Government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, guarantee most mortgages in the USA. However, these companies and their regulator, the Federal Housing Finance Agency (FHFA), won't purchase or guarantee loans that exceed $766,550 in most areas of the U.S. That said, mortgage lenders can still issue loans that exceed the FHFA limit. They’re called jumbo home loans, and they allow buyers to purchase pricier properties that conventional mortgages can’t cover.

Jumbo loans are riskier for the lender since they can’t be securitized by GSEs, so they usually have steeper eligibility criteria compared to conventional mortgages. They may require higher credit scores, higher income, a lower debt-to-income ratio, down payments of up to 30%, and even cash reserves equal to a year of mortgage payments.

Even so, jumbo mortgages offer convenience, higher borrowing ceilings, and even potentially lower interest rates that make them a viable choice for many buyers. Here are some of the benefits you can expect.

Convenience

The primary benefit of a jumbo loan is that it simplifies borrowing for anyone buying an expensive house. Without jumbo loans, some buyers may be forced to delay purchasing so they can save enough money to offset the difference between the home price and the mortgage limit. Others would have to consider multiple mortgages or loan products to manage costs. For the average buyer, a jumbo loan bridges the gap between conventional mortgages and the high sale price of homes in competitive markets.

Jumbo loans are also beneficial to anyone seeking a luxury or vacation house. According to Redfin, the demand for luxury homes is up, with sales rising 2% in the first quarter of 2024 compared to a 4% decline in non-luxury homes. Jumbo loans can make home buying easier for buyers looking for premium properties with plenty of luxury features and amenities.

Flexibility

Jumbo loans aren’t one-size-fits-all. Buyers can choose from different options, including fixed or adjustable rates, interest-only repayment terms, and balloon payments. These are some of the jumbo loan types available to borrowers.

Fixed-rate jumbo loan: This type of jumbo mortgage lets you lock in your interest rate so it doesn't rise or fall with market fluctuations. Borrowers will have the same interest rate for the life of the loan. Fixed-rate loans are ideal for buyers seeking the predictability of fixed monthly payments.

Adjustable-rate loan: With an adjustable-rate mortgage, your mortgage interest is subject to change alongside market interest rates. After an initial period with a fixed rate, your mortgage interest will adjust at certain intervals. While a certain amount of uncertainty is built into adjustable-rate jumbo loans, buyers may be able to benefit if interest rates are on the decline.

Interest-only jumbo loan: With an interest-only jumbo loan, borrowers typically pay only the interest on the loan for the first few years, after which they continue making principal plus interest payments. Interest-only loans offer you lower payments during the interest-only period. These loans may amortize faster if you make principal payments during the interest-only period, too.

Balloon jumbo loan: These loans give you the chance to make small monthly mortgage payments (sometimes interest-only) for a few years, followed by a lump-sum payment that covers the total mortgage balance. Balloon jumbo loans make sense if you're expecting to sell your current home before the mortgage term ends or are anticipating some other major payment (an inheritance or legal settlement) to pay off the mortgage.

It's important to note that interest-only jumbo loans and balloon jumbo loans are considered CFPB non-qualified loans. This means they may have features that may not suit all borrowers.

Increased purchasing power

Redfin's weekly housing market data reveals that the median U.S. home sale price hit a record high in May 2024, marking a 4% increase from the previous year. These record-high prices are at least partly due to a shortage of inventory, and they’re pricing many potential buyers out of the market. In this scenario, jumbo loans can be a big help.

While these loans have much steeper qualification criteria compared to conventional mortgages, they can allow buyers access to higher-value properties and expand their options during the home-buying process. Jumbo mortgages may enable buyers to purchase in the location of their choice and prevent them from having to postpone their purchase or seek properties in cheaper areas.

Investment potential

Jumbo loans aren’t just for your primary home. You can use them to purchase a vacation home or investment property, too. Considering that the real estate market in the U.S. is showing no signs of cooling down, many are seizing the opportunity to purchase second properties in popular vacation destinations or in neighborhoods with competitive real estate markets. Most of these homes are likely to appreciate over time; they may also be viable as rental homes or vacation rentals. Purchasing a luxury property can be a path to long-term wealth-building for many, and jumbo loans can help make it happen.

Jumbo loans may even offer an edge over conventional mortgages to buyers seeking a real estate investment. In some cases, jumbo loans may carry lower interest rates compared to conventional mortgages. Take the time to assess your finances, housing needs, or investment strategies to think about what kind of property you’re looking for. If you still decide to purchase a high-value property, then a jumbo loan will be the right decision for you.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.