Sometimes financial terms sound complicated and arcane; other times they sound exactly like what they are. That's the case with a jumbo mortgage. CNBC explains.
What is a jumbo mortgage?
A jumbo mortgage is a home loan whose value is larger than that of a conventional mortgage. A conventional mortgage is one that can be purchased by government-sponsored entities Fannie Mae and Freddie Mac. These two entities set the maximum value of loans they will purchase.
At what value does a mortgage become jumbo?
The current maximum value for a conventional loan is generally $417,000, but after the housing crash the limit was raised in certain designated "high cost" areas. At first it was raised to $729,750; but then in October 2011 it was reduced to $625,500.
Do jumbo mortgages have higher interest rates?
Generally they do, but the difference between conventional and jumbo mortgage rates has been decreasing because of increasing fees at Fannie Mae and Freddie Mac.
Why do jumbo mortgages have higher rates?
The rates are higher because the lender is taking on more risk with a bigger loan. It can also be more expensive to refinance a jumbo mortgage because closing costs can be calculated as a percentage of the loan amount.
Who funds a jumbo mortgage?
For now, jumbo loans are largely funded and held by big banks. Investors used to purchase these loans in mortgage-backed securities, but that market disappeared between 2008 and 2010, when the mortgage market crashed.
Now investors are slowly coming back. So far there have been just two issuers of jumbo mortgage-backed securities, but that market is expected to grow as investor confidence returns to the housing market.