Jumbo loan and conventional loan:
It is easy to choose between a Jumbo loan and a Conventional loan when looking for the best mortgage to finance your home. Most of the conventional loans are within the conforming loan limit. That means your loan amount would have to be under $548,250 in most of the U.S. If you need to loan a hefty amount, you will typically use a jumbo loan.
Of course, there are some key differences you want to be aware of when buying or refinancing with a jumbo loan. For instance, you need a higher credit score and a large down payment. Here is what you should know.
Difference between Jumbo and Conventional loan:
Most conventional loans have to be within local loan limits set by Fannie Mae and Freddie Mac. Jumbo loans, on the other hand, are for mortgage amounts above conforming loan limits. Hence jumbo mortgages essentially pick up where conventional loans leave off. In 2021, in most of the United States, conforming loan limits max out at $548,250 for a single-family home
That means jumbo loans are typically any amount above $548,250
However, those loan limits are more generous in some high-priced real estate markets. In the most expensive parts of the country, you could get a single-family conforming loan up to $822,375.
Jumbo loan limits vary by lender. But they typically go into the millions. So if you need to borrow more than local loan limits allow, you will likely need a jumbo mortgage.
Jumbo mortgage rates
Taking out a jumbo mortgage does not immediately mean higher interest rates. Jumbo mortgage rates are often competitive and may be lower than conforming mortgage rates. It ultimately depends on the lender and the market conditions. But, if lenders can provide jumbo mortgages, they usually keep their rates competitive.
Interest rates are not only related to market conditions. Factors like your credit score, down payment, cash assets, and income can impact the interest rate you are offered. Jumbo loans are available at fixed and adjustable rates, and your rate may vary depending on the lending institution.
In a nutshell, taking out a jumbo loan doesn’t mean taking out jumbo interest rates. You may even find jumbo rates are lower than conventional rates.
Conventional mortgage rates
Conventional loans are also a smart choice for those who know they do not stay in their house long and want a shorter-term, adjustable-rate mortgage. This option comes with a lower interest rate than that of a fixed-rate loan. Adjustable rates are fixed, but only for a period of time — usually 3, 5, or 7 years. During that initial ‘teaser’ period, the homeowner pays ultra-low interest and can save thousands.
Nowadays home buyers often choose a 5-year ARM or 7-year ARM. These loans can provide thousands in savings while giving the home buyer enough time to refinance into a fixed-rate loan, sell the home, or pay off the mortgage entirely.
But after this low introductory rate expires, the loan’s interest rate — and its monthly mortgage payment — could decrease or increase each year, depending on market conditions.
This makes ARM loans inherently risky for homeowners, and an option that should be considered carefully.