Bigger Houses Equal Jumbo Loans

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I just read an interesting article by Nick Timiraos in the Wall Street Journal (click here to read the article).  The article focuses on a key reason why new home prices have increased in recent years – Americans are buying bigger new homes.  There were a few points that caught my attention:

  • More than half of the new home price increase in recent years is caused by changes in the size and quality of new homes.
  • Average new home sizes have increased while the size of the average American household has decreased.
  • Government policies (such as mortgage interest deductibility) may encourage the trend of larger new homes.
  • While new home prices have increased more than 100% since 1970, if you adjust for the home size, the price increase is only 23% after adjusting for inflation.

Big House

As home prices rise, this pushes more buyers into the jumbo loan category.  So what is a jumbo loan, you ask?  A jumbo loan is defined by Fannie Mae and Freddie Mac as a mortgage amount greater $417,000 in most areas of the country.  (The limit is higher in certain high-cost locations like Hawaii and Alaska.)  Our lenders will process jumbo loans in amounts up to three million dollars.

So what does it mean to you if you need a jumbo loan?  First of all it affects your down payment.  With conventional loans, lenders will allow you to put as little as 3% down on your purchase.  With jumbo loans, the minimum down payment is significantly larger.  Secondly, obtaining a jumbo loan often means that you pay a higher interest rate.  On the day I am writing this, with all other lending criteria being equal, the difference between a jumbo and conforming loan is about one half of one percent for one of our lenders.

So as are looking to move up to a larger home, remember the rules for a jumbo loan differ from those you had when obtaining your current conforming or FHA loan.  Give me a call to discuss your options and loan pricing.  And keep an eye out for my next blog post where I will discuss ways to stay within conforming loan limits to avoid the higher cost jumbo mortgages.

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