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Homebuyers look at mortgage interest rates to determine whether now is the right time to buy a home and, if so, how much they can afford to pay. If you're planning on financing your home with a jumbo loan, interest rates are especially important because the amount you'll be borrowing is larger.
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What are the current interest rates for jumbo mortgages?
According to the Federal Reserve Bank of St. Louis, the 30-year fixed-rate jumbo mortgage index was at 7.08% as of July 18. The Optimal Blue Mortgage Market Index is based on the fixed interest rates of more than one-third of U.S. mortgage transactions.
The company's average 30-year jumbo mortgage rate, based on quotes from lenders listed on its website, was 6.76%, down 0.01 percentage point from a week ago.
What is a jumbo mortgage?
A jumbo loan is a type of conventional loan that isn't insured by the federal government, but unlike a standard conventional mortgage, which is a “conforming” loan within the loan limits set by the Federal Housing Finance Administration, a jumbo loan is a non-conforming loan.
What is the jumbo loan limit for 2024?
The FHFA single-family home loan limit for 2024 is $766,500 in most parts of the U.S. and $1,149,825 in higher-cost areas like Alaska and Hawaii, so if you take out a jumbo loan, you’ll be borrowing more than $766,500 and more than $1,149,825 in Alaska and Hawaii.
What is a 30-Year Jumbo Mortgage?
A 30-year jumbo mortgage is a jumbo mortgage with a term of 30 years. The loan is repaid in 360 equal monthly installments.
Is a $600,000 loan a jumbo loan?
No. A $600,000 loan would be a conforming loan because it is well below the conforming limit of $766,500.
How do jumbo mortgage interest rates work?
Lenders set their own mortgage rates for any type of mortgage and base their rates on a variety of factors. These factors include the state of the economy, the housing market, federal interest rates, and the borrower's qualifications.
Your credit score, down payment size, debt-to-income ratio, loan type, amount, and term are some of the characteristics that give lenders clues about how likely (or unlikely) you are to default on your mortgage payments. The more likely, the higher your interest rate.
Lenders apply an interest rate to the loan principal, which is the amount you borrow. How they do this depends on the type of jumbo loan you take out.
Fixed Rate Jumbo Loan
A typical 15- or 30-year fixed-rate jumbo loan is fully amortizing, meaning you repay the entire principal and accrued interest with scheduled monthly payments.
To accomplish this, lenders create an amortization schedule that determines how much of each payment goes toward principal and how much goes toward interest. At first, most of your payment goes toward interest. Over time, the principal is gradually reduced, changing the balance. Your final payment is mostly principal plus a small amount of interest.
Variable Rate Jumbo Loan
Variable rate jumbo loans are also fully repayable, but their interest rates change over time depending on market conditions.
Jumbo ARMs start with a fixed interest rate, usually for five or seven years. After the fixed-rate period, your interest rate adjusts periodically according to a pre-determined schedule, such as six months or one year. While the interest rate on a jumbo mortgage can go up or down with each adjustment, most ARMs have caps on the amount that can change with each adjustment and over the life of the loan.
Interest rate adjustments are based on the benchmark interest rate to which the lender adds a margin. If the benchmark is 5.5% and the lender adds a margin of 2.5%, then the ARM interest rate will adjust to 8%. Every time interest rates change, so will your mortgage payment.
ARMS may also be interest-only, meaning you only pay interest during the initial fixed-rate period, and then pay principal and interest for the remainder of the loan term.
Balloon Jumbo Lawn
A balloon loan is a short-term, non-amortizing loan that you repay over a number of years (say, seven years). At the end of the seventh year, you receive a lump sum payment on the remaining principal and accrued interest.
What is the difference between a jumbo loan and a conforming loan?
Strictly speaking, the main difference is that Fannie Mae and Freddie Mac, the government-sponsored institutions that buy most conforming loans and package them as securities, can only buy conforming loans. This frees up capital that lenders need to make more loans. But because Fannie Mae and Freddie Mac also guarantee those conforming loans, they manage their risk by setting loan limits and requiring that borrowers meet certain eligibility criteria to qualify for the loans.
From a borrower's perspective, the most notable difference between jumbo and conforming loans is the amount you can borrow. A typical homebuyer can borrow up to $766,500 to fund their purchase with a conforming loan. But buyers using jumbo loans are limited only by their credit and income qualifications and the loan limit set by the lender. For example, Rocket Mortgage offers conventional jumbo loans of up to $3 million, while Chase lends up to $9.5 million.
Jumbo loans are riskier for lenders because their loan amounts are larger and they aren't guaranteed by Fannie Mae or Freddie Mac. Lenders manage that extra risk by increasing borrower qualification requirements and charging borrowers higher interest rates.
How do jumbo loan interest rates compare to conforming loan interest rates?
All else being equal, jumbo loans typically have higher interest rates than conforming loans due to their size and lack of government backing. For example, the interest rate for a 30-year fixed-rate conforming loan published by Zillow on July 18 was 6.36% APR. The interest rate for a 15-year fixed-rate conforming loan was 5.67% APR.
Compare this to published jumbo loan rates: 6.76% APR for a 30-year fixed rate jumbo loan and 6.53% APR for a 15-year fixed rate jumbo loan.
There are similar differences for adjustable rate loans. The average rates published by Zillow are 6.52% APR for a 7-year conforming adjustable rate loan and 6.97% APR for a jumbo loan. The 5-year APY is 6.30% APR for a conforming loan and 6.78% APR for a jumbo loan.
How do I qualify for a jumbo mortgage?
Jumbo loans don't have to meet Fannie Mae or Freddie Mac's standards, but lenders impose their own standards — and those standards can be quite strict because of the size of jumbo loans and the amount of risk they pose to lenders.
Here are the minimum requirements you can expect:
Credit score: With a credit score of 620, you can qualify for a conforming loan, though it won't be the highest interest rate, but to qualify for a jumbo loan, you'll need a score of at least 680. Some lenders also require a score of 720 or higher, according to Experian.
Debt-to-income ratio: Some lenders, including Rocket Mortgage, will approve jumbo loans with a debt-to-income ratio of 45%, while others require 43% or less.
Loan-to-value ratio: Your maximum LTV determines the down payment you need to qualify for a loan. At Rocket Mortgage, this ratio is 80%, meaning you'll need a 20% down payment. Chase advises borrowers to be prepared to need a 30% down payment even if your LTV drops to 70%, but notes that some lenders allow a 90% LTV, meaning a 10% down payment.
Cash reserves: To qualify for a jumbo loan, you'll need cash reserves to cover at least six months' worth of mortgage payments, although some lenders require 12 or 18 months' worth of reserves.
The Pros and Cons of Jumbo Mortgages
A jumbo mortgage is a long-term commitment that can have a significant impact on your finances, so be sure to weigh the pros and cons carefully before applying.
Strong Points
Jumbo loans give well-qualified borrowers access to luxury homes and homes in high-cost areas.
Lenders set their own approval criteria.
Interest rates are competitive with conforming loan rates.
Cons
Jumbo loans usually have strict qualification criteria.
While interest rates are often comparable to conforming loans, a difference of a few tenths of a percentage point can make a big difference in the amount of interest you pay over the life of a large loan.
Jumbo loans often require a large cash outlay for a down payment and closing costs.
Alternatives to Jumbo Mortgages
If you're buying a home in a designated high-cost area, you may be able to get a “super conforming” loan rather than a jumbo loan to finance your purchase.
A super conforming loan is a loan that exceeds the conforming loan limit for single-family homes of $766,500, but falls within the limit for high-cost areas of $1,149,825. The loan can be purchased by Fannie Mae and Freddie Mac, so you must meet their eligibility criteria. However, according to Freddie Mac, there are no specific criteria that distinguish a super conforming loan from a conforming loan.
Whether this is a better option than a jumbo loan depends on your situation. If your loan amount falls within the super conformance limit and the purchase is going to put you over your budget, a super conformance loan that you can qualify for with a 5% down payment may be right for you. Plus, you can have a credit score as low as 620. But keep in mind that if you can only meet the minimum requirements, you're at higher risk of defaulting.
Final Take
Consider whether it might be better to save up an additional down payment or reserve funds to improve your credit score and qualify for a jumbo loan. Your interest rate will likely be the same, and you'll start out with more equity and a more stable financial position.
Gabriel O'Ria contributed to this article.
Data current as of July 18, 2024 and subject to change.
This article originally appeared on GOBankingRates.com: What are the current jumbo mortgage interest rates?