Thirty Year Jumbo Mortgage
Ninety percent of the mortgages issued in this country today are purchased by either Fannie Mae or Freddie Mac. These two government mandated quasi-private institutions buy mortgages and package them for sale on the securities market. That leaves lenders with their coffers refilled and ready to lend again to another homebuyer. Every year Fannie Mae sets a limit on the size of mortgage that the two institutions will purchase; these are called "conventional loans." The current limit is $417,000 except for Hawaii and Alaska, where housing is much more expensive. Any loan above the conventional loan amount must be insured and sold in the private marketplace; these are called jumbo loans.
If you look at the top twenty housing markets in the country today, you'll see that often the median home price exceeds the conventional loan level. In places such as Southern New England, California and Colorado many homebuyers are going to have to use a jumbo mortgage to get into a decent home, despite the amount of the down payment. The thirty year jumbo mortgage is the standard loan in its category.
Because they must be sold through private investment channels and because larger mortgages are considered more risky, a thirty year jumbo mortgage is more expensive than a thirty year conventional loan. Today a thirty year jumbo mortgage with a fixed rate will have an interest rate that is a quarter to half a percent larger than a thirty year fixed rate conventional loan.
Not all thirty year jumbo mortgages are fixed rate loans. In fact, during the buying frenzy over the last five years in places like Boston and Northern California many of the buyers seeking thirty year jumbo mortgages were first time home buyers. People entering the housing market at that level often must take advantage of the initial low interest rates provided by an adjustable rate mortgage, and many did so. The prevailing sentiment was that the loans could be refinanced in five years when the interest rate adjusted, or the home sold for a nice profit.
The two conditions that made that sort of approach work are no longer in sync. The housing market has flattened, and lenders are being much more cautious about allowing large loans to people who are betting on a rising household income or a rise in home prices. A thirty year jumbo is much more difficult to come by today than it was just eighteen months ago.
However as long as Freddie Mac and Fannie Mae keep conventional loans at the current level, thirty year jumbo mortgages are going to be critical in the more expensive housing markets. It's going to require good credit and a healthy income to acquire one, however - at least, one with a reasonable interest rate or a reasonably structured adjustable rate formula.