How to Avoid a Jumbo Mortgage (And Its Jumbo Rate)

It isn’t easy to find a jumbo mortgage these days, and when you do it isn’t cheap. The typical jumbo for the week ending March 27 averaged 6.5 percent, according to HSH Associates, a consumer loan publisher. That’s 1.65 percent more than a conforming 30-year fixed mortgage, which averaged 4.85 percent, according to Freddie Mac.

There are ways to work around high-cost jumbos, but you’ll need a large down payment — 20 percent, if not more — and a high credit score.

The key to unlocking lower rates is to understand the three levels of mortgage loans available to consumers: conforming, super-conforming and jumbo.

Conforming mortgages are no more than $417,000 and can be bought by Fannie Mae or Freddie Mac. These are the cheapest 30-year fixed loans available.

Next are super-conforming mortgages (also known as mini-jumbos) which are $417,000 to $625,000 (with the limit expected to rise to $729,500 in the next few weeks). The actual limit depends on housing costs in your area: the higher the average cost, the higher the limit. The interest rate for super-conforming mortgages is, on average, one-quarter point higher than for conforming mortgages.

Finally, jumbo mortgages. These exceed the limit for super-conforming loans. Fannie and Freddie won’t buy them and, consequently, fewer lenders are willing to offer them.

1. Get a conforming mortgage and get a second mortgage along with it. This lets you enjoy the low rate on the $417,000; you’ll pay the higher rate only on the rest. Most lenders require you to make a down payment of at least 20 percent (or maintain 20 percent in equity if refinancing). Only a few offer this structure with only 10 percent down. Be prepared to make a lot of phone calls to a variety of lenders and mortgage brokers to find one that will accept 10 percent down.

2. Take out a super-conforming mortgage and a second trust. This option is similar to the first scenario and is used for larger loans. Using this idea, you’ll pay a higher rate than if you use a conforming mortgage, but you’ll still save money compared to using a jumbo for the entire loan.

3. Get an adjustable-rate mortgage. ARMs got a bad name during subprime lending’s heyday, but they can be an effective tool for qualified borrowers. Five- and seven-year ARMs typically offer rates similar to those offered on 30-year conforming mortgages, but for amounts up to $2 million. Borrowers must have a down payment of 20 percent to 35 percent to qualify, and you’ll risk paying much higher interest rates when the initial rate expires.

To find the best loan program, work with an experienced mortgage professional. Unlike years past, when it was easy to call a bank and get a rate, today’s lending environment is more complex. The loan you receive will depend on your situation, including your credit score, down payment, the property’s loan-to-value ratio and, if refinancing, whether you are taking cash out.

Ric Edelman is Chairman and CEO of Edelman Financial Services LLC, which manages billions of dollars for individuals and families nationwide. Ric is a frequent On the Money contributor and the author of seven books on personal finance, including his new #1 Bestseller, RESCUE YOUR MONEY.