As the name implies, a jumbo mortgage is big. It is a mortgage that is larger than the required loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO) which are set on an annual basis. Because of going over the limit, a jumbo loan is not eligible to be bought, guaranteed of securitized by secondary mortgage lenders Fannie Mae or Freddie Mac. Other institutions will securitize jumbo mortgages because they carry a higher credit risk they also have higher interest rates.
Jumbo mortgages, because of there size, are used to buy very expensive homes. Luxury properties are harder to re-sell at the original purchase price if a loan default occurs. Because of the higher risk, a jumbo loan requires a bigger down payment and higher interest rates. Interest rates can vary depending on the type of real property and the amount of the loan. Multiple appraisals are often needed before a jumbo loan can be approved. Closing costs are also higher when trying to refinance a jumbo loan.
As real estate prices climb higher, borrowers take out more jumbo loans. When affordable homes become more expensive, they exceed the regular loan limits and require a jumbo mortgage to purchase them. A loan of $650,000 or more is called a super jumbo mortgage. Both Jumbo and super jumbo loans increase the number of years needed to pay back the loan, taking as long as 40 or 50 years. A loan period of 30 years or more increases the lenderís profits. Interest-only loans can be of some help to the borrower by setting the payment of the principal many years into the future thus giving the borrower lower payments in the beginning.
Foreclosures on jumbo mortgages have increased in recent months because of the turmoil in the lending business. Jumbo mortgages become harder to acquire and lenders limit no-money or little-money down payment loans.