Have you ever heard of Jumbo Loans? Of course many of us have heard of a fixed mortgage or an adjustable rate mortgage. Still others may have even heard of a balloon mortgage, but a Jumbo Loan? What in the world is a Jumbo Loan?
What is a Jumbo Loan?
According to Investopedia.com, a Jumbo Loan (also referred to as a Jumbo Mortgage) is “a mortgage with a loan amount exceeding the conforming loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO), and therefore, not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. OFHEO sets the conforming loan limit size on an annual basis.”
The Jumbo Loan’s Gaining Popularity
As of this current date, a loan that is more than $417,000 exceeds the conforming loan limit set by the OFHEO. This means that any loan that is larger than this amount is considered a jumbo loan.
These loans used to carry a very high interest rate because of the increased risk to the bank, but with the falling rates recently, these jumbo loans have become very enticing.
House values are down and the jumbo loan rates are at a historic low — 5,15%. For those individuals that had their eye on the mansion down the street, they feel that now is the time to strike. In fact, 1 out of every 6 house purchases this year have been jumbo loans!
Aren’t We In a Recession Here?!
My initial reaction to the high number of jumbo loans was, “I thought we were in a recession?! How is it that so many loans are for an amount that’s greater than $400,000?!”
Of course, if you live in California, you already know that $400,000 doesn’t go very far when it comes to purchasing property, so this may factor into the equation.
Secondly, not everyone has been negatively affected by this recession. Some have actually positioned themselves so well that they are thriving on the recent downturn. I understand that this is a possibility as well, so these businessmen may be purchasing large estates as well.
However, there is a third category to this equation. Those that are middle-class, but have always dreamed of living in that large estate in their neighborhood. After all, the price is lower than it’s ever been, the interest rates are low, and home prices are at their bottom, right? Well, that’s what they’re hoping.
A Message For Those Dreamers Out There
My wife and I almost started life this way. We figured, why not just buy the house that we love now so that we can enjoy it for the rest of our lives? It sounds quite logical, but in reality, it is most likely one of the worst financial decisions you’ll ever make.
I wrote an article a few months ago (Buy the Pricey House? Or the Moderate House?) that compared the cost (after all interest was paid to the bank) of a moderately priced home and a more pricey home after 30 years of payments, and the results were surprising, even to me! These homes that were only priced $95,000 from one another actually cost a difference of $234,000 after the 30 year loan (due to interest)!
The same is true for the jumbo loan houses. The interest rate may sound low at 5.15%, but if the loan is for a 30 year period, that $417,000 loan will actually cost you $819,695! That doesn’t sound like much of a deal to me.
Stay away from these jumbo loans. They’ll only keep you house poor for the rest of your life.
Have you ever heard of jumbo loans? Do you know anyone that has taken out a jumbo loan from the bank? What are your thoughts?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.